The Central Bank has been taking flak from all sides lately over its insistence on maintaining what critics call "crippling" and "bankrupting" interest rates, a policy endorsed by the prime minister to keep lenders operating above the level of inflation.

But in a reversal that could mollify bankers and borrowers -- not to mention VEB chief Vladimir Dmitriyev and Mayor Yury Luzhkov, who both took digs at the Central Bank's monetary policy last week -- First Deputy Chairman Alexei Ulyukayev said Friday that the bank could begin cutting rates as soon as next quarter.

The comments, made in an interview on Ekho Moskvy radio, reflect a growing confidence that inflation will begin to subside as production plummets and the devalued ruble starts to regain ground against a falling dollar. Prime Minister Vladimir Putin said earlier this month that setting interest rates below inflation would "destroy the economy" -- a position that few have publicly challenged.

A notable exception is Luzhkov, who in recent months has rarely missed an opportunity to criticize the Finance Ministry and Central Bank for keeping interest rates high, a policy he says has fed inflation rather than being a product of rising prices.

The country's benchmark rate, the refinancing rate, has been at 13 percent since Dec. 1, although interbank rates have fluctuated wildly since then, at times passing 20 percent. The government forecasts full-year inflation of 13 percent to 14 percent, roughly the same as in 2008.

"I think it's entirely reasonable to expect a lowering of the refinancing rate in the second quarter, along with majority of our other instruments. ... It'll be a little step, but it's important for us to define the tendency," Ulyukayev said, RIA-Novosti reported.

The comment was not included in a transcript on Ekho Moskvy's web site.

Ulyukayev said he was certain that Finance Minister Alexei Kudrin's predictions that inflation, which has jumped to about 15 percent in recent months, would fall were "absolutely" correct.

But the financial crisis may not be solved quite yet.

Economists say any easing of key interest rates would also pave the way for further speculation against the ruble, which banks made a profitable sport of during its three-months of controlled devaluation, as well as renewed capital outflows.

The high interest rates were, in part, intended to make ruble deposits worthwhile for investors who had been rapidly switching to foreign currencies to take advantage of higher post-inflation rates. But now that the Central Bank is starting to buy back dollars to prevent the ruble from rising too rapidly, critics of the rates say it's time to start cutting.

One particular concern, analysts and market participants say, is that high interest rates could spell trouble when loans come due this fall. Bad loans are expected to compose a double-digit percentage of credit portfolios this year and are made even more difficult to repay by the high rates that commercial banks are charging.

Finance Minister Alexei Kudrin estimated last week that the figure could hit 10 percent, and Alfa Bank president Pyotr Aven said the figure could hit 15 percent to 20 percent in an interview with the Financial Times.

In the interview, Aven joined the ranks of bankers canvassing for lowered interest rates, which would reduce the number of bankruptcies when loans are due in the third quarter, he said.

Dmitriyev, chief of state-owned Vneshekonombank, the supervisory board of which is chaired by Putin, also came out against the high rates last week, calling them "clearly and inevitably crippling."

Putin said on March 12 that the Central Bank could not afford to reduce rates below inflation and that cutting rates by more than a couple of percentage points may be impossible for a number of other reasons, economists said.

If the currency remains stable and outflow stagnates, the Central Bank will likely stick to its word to reduce interest rates in April, said Yevgeny Nadorshin, chief economist at Trust Investment Bank. The cut, however, would likely be as little as half a percentage point, he said, hardly what banks would like to see.

At the moment, Central Bank interest rates can run high as 15 percent to 19 percent, a striking contrast with the rates in the United States and Russia, which are now lower than one percentage point.

Ulyukayev took issue with "my kindly comrade" Aven's characterization of the Central Bank's lending, contending that the refinancing rate was 13 percent and that "most of the funds we offer banks we offer through repo operations and secured loans at 11 to 12 percent, up to 13 percent. It's yours for a year, be my guest.

"And the respected Alfa Bank comes and takes these funds. Unsecured loans are another matter, they're the one instrument where we really are taking 16 percent for five weeks and 18 percent for loans of three to six months. ... We limit the amount of funds we give through such instruments, and we plan to do so in the future," he said.

The main problem now, Finance Minister Alexei Kudrin and Ulyukayev agreed last week, is the rise of nonperforming loans.

Nonperforming loans rose 25 percent month on month in March, Nadorshin said, and the situation will become worse as more banks facing loan repayments reveal how deeply in trouble they are.

"Initially, it was just suspected that a lot of loans were not as good as they seemed to be, and only banks knew the real quality of their loan portfolio," he said. "Now, the situation will become explicit."

This puts the Central Bank between a rock and hard place. The majority of market participants still expect speculation on the ruble, and the fear of nonperforming loans may set panic on the market, said Marina Vlasenko, a senior credit analyst at Commerzbank.

At the same time, the Finance Ministry and Central Bank also have to worry about a weaker ruble's effect on inflation.

"Interest rates have to stay high to control inflation and support the currency, but on the other hand, they're a burden on the economy," said Eugene Belin, head of fixed income at Citibank. The Central Bank would do best, he said, to promote collateralized lending so healthy banks that can afford to put down collateral will receive cheaper rates.

The Central Bank can also work on lowering repo rates, Vlasenko said, a change that would present fewer problems than reducing long-term refinancing rates.

Were the Central Bank to actually lower interest rates significantly, there is still no guarantee that the discounts would ever reach corporate lenders, who may be being overcharged by banks.

The Deposit Insurance Agency told Vedomosti last week that it had asked the Central Bank to investigate banks that have been overpricing interest rates at 17 percent for deposits amounting up to 700,000 rubles ($21,000).

Such banks may not change their ways, even if the Central Bank does, Nadorshin said.