Ruble Approaches Record Low as Oil Slides Before Rates Decision

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The ruble retreated toward a record as Brent crude resumed its decline and investors pared bets on interest-rate increases before Russia’s central bank meets tomorrow.

The ruble declined 1.4 percent to 54.7970 per dollar at 7:14 p.m. in Moscow, taking its drop this week to 4.2 percent. The yield on 10-year government bonds fell 26 basis points after reaching a five-year high yesterday. Brent tumbled as much as 4.4 percent to $63.91 a barrel and West Texas Intermediate crude reached $60.63. The Micex Index climbed 0.8 percent to 1,486.85.

Russian policy makers are considering raising interest rates to stabilize the ruble after measures, including restricting liquidity and currency intervention, failed to halt this year’s 40 percent slide. The risk is that higher rates will choke off growth in an economy that is predicted by the government to contract next year for the first time since 2009.

“With Brent below $65 and WTI below $62 the ruble is poised to decline much further,” Bernd Berg, a London-based strategist at Societe Generale SA, said by e-mail. “Only market expectations of a massive reaction of the central bank at tomorrow’s meeting in the form of rate hikes and/or liquidity tightening is currently preventing a much steeper drop of the ruble.”

If the central bank tomorrow doesn’t move to “restore financial stability” and stabilize the ruble, the currency will drop toward 57 versus the dollar initially after the rate decision and then head toward 60 against the dollar, according to Berg. The ruble is the worst performer among 24 emerging-market currencies this year.

Rates Bets

Investors are betting the Bank of Russia will increase its benchmark rate by 2.1 percentage points over the next three months, according to forward-rate agreements, down from 4.3 points yesterday.

“There’s short-covering in the bond market today after a long string of losses on bets of tomorrow’s rate increase,” Sergey Batasov, the head of bond trading at UniCredit SpA in Moscow, said by e-mail. “The market is pricing in a rate hike of 150 to 200 basis points.”

The central bank will probably raise its rate by 100 basis points to 10.5 percent tomorrow, the median estimate in a Bloomberg survey of economists shows. Fifty of 77 traders polled by brokerage Tradition project a rate increase of between 100 and 400 basis points. The regulator will announce the decision at about 1:30 p.m. in Moscow, followed by a press conference.

Policy makers are facing dwindling options after they shifted to a free-floating exchange rate ahead of schedule last month and spent almost $80 billion on defending the currency. The central bank, led by Governor Elvira Nabiullina, has raised rates by 400 basis points since President Vladimir Putin’s incursion into Crimea in March, which led the U.S. and the European Union to impose sanctions.

OAO Sberbank, the nation’s biggest lender, advanced 2.3 percent while OAO Gazprom, the nation’s biggest natural gas producer, increased 0.6 percent.

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