Ignatiev Reviving Rate Increases This Year, Futures Show: Russian Credit
Ignatiev to Raise Rates This Year
Alexander Zemlianichenko Jr/Bloomberg
The Russian central bank saw “the rate of price growth accelerate in August, mainly driven by inflationary expectations” because of the drought, it said in an e-mailed statement.
The Russian central bank saw “the rate of price growth accelerate in August, mainly driven by inflationary expectations” because of the drought, it said in an e-mailed statement. Photographer: Alexander Zemlianichenko Jr/Bloomberg
Speculation Russian inflation will accelerate to the highest level since January is prompting traders to bet policy makers will raise interest rates this year even as economists predict no change.
Borrowing costs will jump 55 basis points, or 0.55 percentage point, in the next three months and as much as 120 basis points in the next six months, forward rate agreements show. Economists estimate key interest rates will stay on hold through the rest of 2010, with increases in the refinancing, repo and deposit rates only by the end of June 2011, according to the median of estimates in Bloomberg surveys.
“People are pricing in a lot of rate hikes,” Roman Sulzhyk, director of rates trading at Deutsche Bank AG in Moscow, said in an e-mail response to questions yesterday. “The high forward implied rates can be almost fully attributed to market expectations of the central bank hiking to counter inflation.”
Russia, the world’s biggest energy exporter, may be forced to reverse course after 14 cuts to the refinancing and repo rates between April 2009 and May this year to revive the economy amid a record 7.9 percent contraction last year. Inflation may reach as much as 8 percent this year as the worst drought in 50 years pushed up food prices, Deputy Economy Minister Andrei Klepach told reporters in Moscow yesterday, revising an earlier forecast for inflation as low as 6 percent. Annual consumer price increases slowed to 5.5 percent in July from 8 percent in January.
Bank Meeting
Bank Rossii Chairman Sergey Ignatiev kept the refinancing rate on hold at a record low 7.75 percent today, as forecast by all 13 economists surveyed by Bloomberg. The overnight repo rate was also held at 5 percent, and the deposit rate, the cost of interest earned by banks for leaving money with the central bank overnight, was held at 2.5 percent, also matching median estimates of 10 economists surveyed by Bloomberg.
The central bank saw “the rate of price growth accelerate in August, mainly driven by inflationary expectations” because of the drought, it said in an e-mailed statement detailing the rates decision today. Still, interest rates will be held at current levels for the “coming months,” the statement said. The next rate review is scheduled for September.
Raising Forecasts
Citigroup, Renaissance Capital, ING Groep NV, Danske Bank AS and UniCredit SpA have all increased their inflation forecasts this month. The “devastating impact” of the drought on food prices will bolster inflation to 8.3 percent this year, according to a UniCredit report Aug. 18. A 10 percentage-point increase in food prices would boost Russian inflation by 3.2 percentage points, New York-based Citigroup said Aug. 19.
The drought in Russia, the world’s third-biggest wheat producer, pushed wheat prices up 6.2 percent on the Chicago Board of Trade this month. Prices for grains, beans and pulses rose 3.9 percent last month, the biggest monthly jump since May 2008, according to Russia’s state statistics service.
The six-month forward-rate agreement traded at 4.95 percent today, or 1.20 percentage points higher than the three-month MosPrime rate at 3.75 percent, according to data compiled by Bloomberg. It was at 4.9 percent yesterday. The nine-month forward-rate agreement traded at 5.45 percent, indicating a 1.71 percentage-point increase by the end of May, the data show.
Ruble
The ruble snapped a three-day advance, weakening 0.3 percent to 30.78 per dollar by the 5 p.m. close of trading in Moscow. The currency has dropped 1.6 percent in August and so far this year. Non-deliverable forwards show the ruble at 30.9766 per dollar in three months, the weakest since Aug. 25.
The yield on Russia’s dollar bonds due in 2020 fell 14 basis points to 4.72 percent today.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose 1 basis point to 180 basis points on Aug. 30, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Russia credit-default swaps are 1 basis point more expensive than contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. The difference has narrowed from 40 on April 20.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose 12 basis points to 237, according to JPMorgan EMBI+ Chase & Co. indexes. The yield difference compares with 156 for debt of similarly rated Mexico and 230 for Brazil, which is rated two steps lower at Baa3 by Moody’s. The spread on Russian bonds is 60 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
‘Broad Indicator’
Russia’s credit markets are underdeveloped so policy makers don’t target a single benchmark interest rate, unlike the Federal Reserve or the European Central Bank, said Elina Ribakova, Citigroup’s chief economist in Moscow. The four key rates - the refinancing, fixed repo, overnight repo and deposit rates - all relate to Bank Rossii’s lending to banks, making the MosPrime a “broad indicator” of rate expectations, she said.
Bank Rossii probably will increase the overnight repo rate by a total 0.50 percentage point by the end of the second quarter of 2011, and the refinancing and deposit rates by 0.25 percentage point, according to the median forecast of more than 10 economists surveyed by Bloomberg.
‘Uncertainty’
“There is definitely a lot of uncertainty on the market right now because of inflation, people believe rates will go up,” said Eugeny Zaichikov, director of fixed income and money market trading at Citigroup in Moscow. “The central bank is not likely to hike rates any time soon because the pick-up in consumer prices isn’t caused by monetary factors.”
Finance Minister Alexei Kudrin told reporters over the weekend that the central bank shouldn’t try to curb inflation using “monetary measures” because they don’t curb price increases.
The lack of a target rate means that forward-rate agreements are also pricing in “the volatility of overnight interest rates,” said Batubay Ozkan, head of global markets, central and eastern Europe, the Middle East and Africa, at Deutsche Bank, Germany’s largest bank, in Moscow.
The overnight MosPrime rate, which was 2.75 percent today, is the average interest rate banks charge each other to borrow cash. The rate can fluctuate between the deposit and repo rate levels when demand for rubles is high, such as before a company tax deadline, Ozkan said. Investors and banks use forward-rate agreements to hedge against that volatility, he said.
Inflation accelerated to 5.4 percent this year as of Aug. 23, up from 4.1 percent at the start of June, according to data from the federal statistics service. Agriculture Minister Elena Skrynnik reduced the country’s grain forecast by 9 percent on May 31, Moscow-based news agency Interfax reported at the time.
“The common view is that inflation will go up and it’s quite a big issue for the market at the moment,” said Perttu Tuomi, a derivatives trader who specializes in Russian rates trading at Sampo Bank Plc in Helsinki. “If inflation really goes near 10 percent we would really see a rally in forward rate agreements.”
To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net
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