Traders are scaling back bets for lower interest rates in Russia over the next three months after the central bank warned that inflation threatens to drive borrowing costs higher.
In keeping the benchmark at 7.5 percent two days ago, policy makers led by Chairman Elvira Nabiullina said they could raise rates if “inflation risks materialize.” The market is “prematurely” pricing in cuts from the third quarter as food drives consumer-price growth to the highest level since 2011, Goldman Sachs Group Inc. said in a June 16 report. The discount on three-month forward-rate agreements fell to 24 basis points below the MosPrime rate from 63 at the end of last week as bets on lower borrowing costs eased, data compiled by Bloomberg show.
While the central bank expects the economy to expand the least since 2009 this year amid international sanctions slapped on Russia because of its incursion into Ukraine, inflation accelerated last month led by food prices after a ban on imports of pork from the European Union. A rate increase remains a risk before the central bank “begins a cautious rate-cutting cycle” in the fourth quarter, Goldman said.
“The central bank clearly showed that it’s absolutely indifferent to economic growth, that inflation is its top priority,” Oleg Kouzmin, an economist for Russia and the Commonwealth of Independent States at Renaissance Capital in Moscow, said by phone yesterday. “There was no rate hike but the statement was extremely hawkish.”
Kouzmin, who worked as a consultant to the central bank’s monetary policy department until last year, said it was the “toughest” statement he’d seen from the regulator. Renaissance extended its outlook for a rate cut to the fourth quarter of 2014 from the third after the comments.
While the outlook for lower borrowing costs helped reduce the extra yield on two-year government ruble bonds over Bank Rossii’s main rate to 67 basis points last week, matching the lowest gap of the past nine months, the spread was at 70 basis points as of 6:14 p.m. in Moscow.
The central bank has raised its benchmark by 200 basis points since February as the standoff with the U.S. and its allies over Ukraine intensified. Nabiullina told reporters in Moscow on June 16 she’s “very concerned” about economic growth declining “steadily” and an increase in the inflation, now 7.6 percent. Russia’s economy will expand as much as 0.4 percent this year before recovering “slowly” to 0.9 percent next year and 1.9 percent in 2016, she said.
“Risks to the policy rate in the short term are to the upside,” Goldman economists Clemens Grafe and Andrew Matheny wrote in the note. “The government bond curve has been pricing too many rate cuts over too short of a period of time.”
Even amid caution about inflation, the central bank would be too worried about exacerbating the worsening cash shortage among lenders to raise interest rates, according to Konstantin Nemnov, who helps manage $3 billion as the head of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg.
Russian lenders have become more reliant on the central bank for funding as foreign investors are deterred by the escalating crisis in Ukraine. Central bank loans comprised 8.2 percent of the banking industry’s funding as of June 1, an increase from 5.4 percent at the start of 2013, its data show.
The ruble is the third-worst performing developing-nation currency this year, down 4.8 percent versus the dollar. It has risen 1 percent this month, the second best in emerging markets.
VTB Capital’s chief economist for Russia, Vladimir Kolychev, expects a 50 basis-point rate cut in the fourth quarter as inflation will dip below 6 percent this year. A further 50 basis points will follow in the first and second quarters of 2015, he said by phone yesterday.
“The market is expecting rate cuts this year, but less than a week ago,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail yesterday. “Now it’s clear that the central bank is undoubtedly taking a hawkish stance, at least through the summer.”