Russian Bonds Fall as Central Bank Holds Rates to Curb Inflation

  • Policy makers to resume cuts once consumer price growth slows
  • Decision bolsters ruble after worst losses in eight weeks

Russian bonds fell after the Bank of Russia kept interest-rates on hold for a second month in a move that showed policy makers are prepared to withhold stimulus to a recession-scarred economy for a second month to curb inflation.
 
The yield on five-year notes rose two basis points to 10.15 percent, a set-back for Russian government bonds that have handed investors the world’s best returns this year. Among the 39 analysts surveyed by Bloomberg before the decision, 19 had forecast a pause while the remainder anticipated a 50 basis-point cut.

The central bank today said it’s prepared to resume easing if its sees evidence that inflation is falling in line with its forecast, which will lend support to Russian bonds, said Dmitri Barinov, who oversees about $2.6 billion of assets at Union Investment Privatfonds GmbH in Frankfurt. Policy makers are torn between the need to spur growth by cutting rates, and arresting inflation that is almost four times its target. 

Dovish Wording

“The wording after the decision was dovish and hinted on cuts in the nearest future,” Barinov said by e-mail. “The market will keep on pricing cuts in this current stable environment.”

The ruble gained 0.8 percent to 63.9 per dollar by 5:39 p.m. in Moscow, on course for the first monthly advance since April. Friday’s increase came in the context of the biggest losses among 24 emerging-market currencies tracked by Bloomberg this week of 2.9 percent. The ruble’s slump, the steepest in eight weeks, is seen as a catalyst for consumer-price growth.

Russian government bonds have handed investors a 24 percent return this year, the best performance among emerging markets tracked by Bloomberg.

Although policy makers stopped short of bringing benchmark rates back to where they were before last December’s emergency increase to 17 percent, it’s important they signaled they are ready to resume easing, said Oleg Kouzmin, a former central bank adviser who’s now an economist at Renaissance Capital in Moscow.

“The central bank implicitly promises policy easing at one of its upcoming meetings,” Kouzmin said by e-mail. “We consider this as a very rational decision that would help to strengthen the central bank’s credibility.”

The Micex stock index added 0.2 percent, led by Sberbank PJSC. Russian equity funds had $49.7 million of inflows in the week through Oct. 28, Sberbank CIB said in an e-mailed note, citing EPFR Global data. Shares of Mechel OJSC, Russia’s largest coal producer, jumped 10 percent on a report that the company may sell a deposit in the nation’s Far East to pay debts owed to the country’s biggest lender.

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