Ruble Close to Erasing 2015 Advance as Oil Spurs Inflation Risk

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The ruble weakened past 60 against the dollar for the first time since March as oil declined, raising the likelihood that Russia’s central bank will hold off on cutting interest rates this week.

The currency fell 1 percent to 60.237 against the dollar by 6:46 p.m. in Moscow after earlier touching 60.937, surpassing the 60.736 at which it started the year and briefly erasing its 24 percent advance through May 18. Ruble-denominated government bonds, known as OFZs, declined for a seventh day, with the yield on five-year securities rising 11 basis points to 11.19 percent.

The rapidly weakening ruble may lead to a pause in the Bank of Russia’s rate-cutting cycle as more expensive imported goods spur inflation. That leaves the central bank with a “difficult choice” on July 31 as Russia’s slowing economy calls for looser monetary policy, according to Capital Economics.

“On the one hand, the recession in the economy and extremely tight credit conditions argue for a rate cut,” Liza Ermolenko, an analyst at Capital Economics in London, said in e-mailed comments. “But on the other hand, easing policy at the time when the ruble is weakening sharply could cause it to fall even further, creating risks for inflation and financial stability.”

Policy makers will probably leave rates unchanged on Friday, Izvestia newspaper reported, citing unidentified entrepreneurs who said they heard Bank of Russia Governor Elvira Nabiullina speak at a meeting last week. She doesn’t see a need to cut rates in the current environment, one of them said. The central bank’s press service refused to comment on the story due to the quiet period before the rates decision.

Smaller Auction

The dollar’s 14-day relative strength index versus the ruble climbed to 79, the highest this year and past the 70 level that indicates to some analysts a security is overbought and might reverse.

The Finance Ministry will offer 10 billion rubles of floating-rate notes due December 2017 in a weekly auction on Wednesday, the smallest amount since Feb. 25. Russia canceled most of its debt auctions last year after yields rose to a level it considered too high.

The key rate will be reduced by 50 basis points to 11 percent, according to 26 out of 34 analysts surveyed by Bloomberg. That would be the smallest cut since January. It was raised 6.5 percentage points to 17 percent in December to arrest a slump in the ruble.

Borrowing costs are coming down as oil rebounded from a six-year low and a cease-fire in Ukraine reduced the likelihood of further sanctions after Russian companies and banks were cut off from Western financial markets.

Inflation Direction

Annual inflation slowed to 15.3 percent last month after reaching a 13-year high of 16.9 percent in March. Still, weekly consumer-price data indicate it may have accelerated again this month, Deutsche Bank AG analysts Yaroslav Lissovolik and Artem Zaigrin said last week from Moscow.

While consumer-price gains may stay around the 15 percent level until November when the base effect from the spring 2014 ruble depreciation wears off, the central bank focuses on inflation 12 months ahead and may cut the key rate by 100 basis points, according to Sberbank CIB.

To address the weakening ruble, policy makers may instead halt its $200 million daily dollar purchases, Vladimir Pantyushin, an analyst at the investment-banking unit of Russia’s largest lender, said from Moscow.

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