Russian Resistance to Ruble Surge Signals Rates Plunge to BNP

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Russia's Inflation
Customers browse the dairy section of a supermarket at the Neglinnaya Plaza shopping center in Moscow. Consumer price growth accelerated to 16.9 percent in March, the fastest pace in 13 years, while the Economy Ministry sees inflation dipping to 12 or 13 percent before September. Photographer: Photographer: Andrey Rudakov/Bloomberg

Russia’s central bank is poised to cut interest rates by the most since January this week as policy makers insist the world’s biggest currency rally is over, according to economists at BNP Paribas SA and Renaissance Capital.

All 38 analysts surveyed by Bloomberg expect Bank Rossii to reduce its key rate by at least 100 basis points from 14 percent when policymakers meet Thursday, with 13 forecasting a bigger cut.

While the exchange rate’s 18 percent rally this year has helped stem inflation by reducing the cost of imports, it’s also clipped the revenue in rubles from oil exports, hampering the economy as Western sanctions and collapsed crude prices drive the economy toward recession. Finance Minister Anton Siluanov said the ruble was too strong and central bank Deputy Governor Ksenia Yudaeva said the oil-driven rally was over last week.

“There could be a more pronounced rate cut,” Oleg Kouzmin, an economist for Russia at RenCap in Moscow and a former central bank adviser, said by e-mail on April 23. “The stronger ruble and better-than-expected inflation dynamics give room for a faster normalization of interest rates.”

The ruble has rebounded as the conflict in Ukraine subsided and oil prices picked up from a six-year low in March. Four months ago, when the ruble was leading currency declines, central bank Governor Elvira Nabiullina increased the main rate by 6.5 percentage points to 17 percent.

Extraordinary Circumstances

BNP Paribas economist Michal Dybula sees a “hefty” 200 basis-point cut. “The scale and pace of the currency appreciation appear to have sparked concern among Russian policymakers,” he said in an e-mailed note on April 22.

Traders have widened their wagers on reductions for the next three months to 140 basis points from 115 in the past week, forward-rate agreements show.

“If I were a central banker, I would cut the rate to where it was before the emergency meeting in the middle of December” Vladimir Kolychev, the Moscow-based chief economist for Russia at VTB Capital, the investment banking arm of the country’s second-biggest lender, said by phone on April 23. “All those extraordinary circumstances that pushed the regulator to act are gone.”

An “aggressive” cut of 150 basis points to 200 basis points may boost short-maturity ruble bonds, pushing the yield down as much as 50 basis points, Bank of America Corp. analysts Vladimir Osakovskiy and Arko Sen said in a note to clients. Russia’s local-currency government notes have handed investors a 38 percent return this year, the biggest among emerging markets tracked by Bloomberg.

Hot Pies

Dmitry Polevoy, ING Groep NV’s chief economist for Russia and the Commonwealth of Independent States, is sticking to his forecast for a 100 basis point cut because inflation prospects “haven’t changed much, so there’s not much room for optimism.”

Consumer price growth accelerated to 16.9 percent in March, the fastest pace in 13 years, while the Economy Ministry sees inflation dipping to 12 or 13 percent before September.

By borrowing in dollars to purchase higher-yielding ruble securities, investors have earned 24 percent this year in the world’s best carry trade. That’s fueled gains in the currency that Siluanov said were excessive, RIA Novosti reported.

The Finance Ministry has sold out three weekly debt auctions in a row and investors are “snapping up our bonds like hot pies,” Siluanov was quoted by the Interfax agency as saying Friday.

Policy makers have moved to blunt the advance by raising the cost of foreign currency that banks borrow from the central bank at repurchase auctions to bet on ruble assets.

“There is definitely a case for a bigger rate cut,” Liza Ermolenko, an economist at London-based Capital Economics Ltd., said by e-mail on April 23. “We wouldn’t be surprised if the Bank decided to test the markets and cut rates by more than what most currently expect.”

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