ING Saying Russia Inflation to Fall Lifts Bonds on Rate-Cut Bets

  • Inflation will drop to 13% by year end, according to ING
  • Russian bond yields have fallen 124 basis points in October

Russian government bonds advanced for a second day after ING Groep NV said weekly consumer-price data are pointing to a slowdown in inflation, boosting expectations the central bank will return to interest-rate cuts to buttress the economy.

Yields on five-year government bonds fell nine basis points to an 11-month low of 10.18 percent by 7:02 p.m. in London. As the first recession in six years pummels consumer spending, Russia’s inflation will slow to 12.9 percent to 13 percent by the end of the year, according to ING chief economist for Russia Dmitry Polevoy. The rate was 15.7 percent in September after touching as high as 16.9 percent in the first quarter.

Data this week showed retail sales shrank more than forecast in September, declining 10.4 percent. The Bank of Russia, which meets Oct. 30 to decide interest rates and again in December, lowered benchmark borrowing costs by 600 basis points this year before pausing in September after a rout in the ruble threatened to stoke inflation back toward March’s 13-year high.

Given the deterioration in consumer demand, "we stick to our call of the central bank cutting rates by 50 points at both meetings this year," Polevoy said.

Longer Duration

Citigroup Inc. recommended investors increase the duration of Russian government bonds in their portfolios, because it also sees more easing in store. The five-year yield has fallen 124 basis points in October, exceeding declines in all major emerging markets other than Turkey, according to data compiled by Bloomberg.

The ruble strengthened 0.4 percent to 62.7590 per dollar on Thursday, tracking gains in the price of crude, Russia’s main export earner. The Micex Index of stocks was little changed at 1,712.10.

Russia’s inflation rate will probably drop to 9 percent in the first quarter of 2016, according to the median estimate in a Bloomberg survey.

Citigroup also expects 100 basis points of additional easing by year-end so long as the Federal Reserve doesn’t raise rates in December, according to Luis Costa, Citigroup’s head of foreign-currency and local markets strategy in central and eastern Europe, Middle East and Africa, said in an e-mailed note.

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