Russian Bonds Rise on Speculation Rate Cut Cycle Can Resume

  • Ruble extends loss for month to 5.6 percent as oil declines
  • Goal of cutting base rate `totally valid': Uralsib Capital

Russian bonds rose, paring a monthly decline, as data showing the inflation rate fell last week and a successful bond auction boosted speculation the central bank will be able to resume interest-rate cuts in 2016.

Two-year government debt reversed losses and rose for the first day in five, reducing the yield by 3 basis points to 10.47 percent. The inflation rate dropped to 14.6 percent as of Dec. 14 from 14.8 percent the previous week, ING Groep analyst Dmitry Polevoy said, citing his own calculations based on data from the state statistics office. The Finance Ministry sold 88 percent of the debt it offered today compared with 66 percent last week.

After voting Friday to leave monetary policy unchanged, Bank of Russia Governor Elvira Nabiullina said if inflation allows she plans to resume cutting rates in 2016 to spur an economy that’s in recession. Policy makers reduced the main rate by 600 basis points this year before leaving it at 11 percent since July as the ruble declined with oil prices and Russia imposed trade sanctions on Turkey.

"Of course, there may be a small bump on the back of Turkey, that’s why they absolutely correctly kept the key rate unchanged this time,” said Dmitry Dudkin, head of research at Uralsib Capital. “Rates are now ultra high” and the goal of cutting them to the level of 5.5 percent seen before 2014 “remains totally valid.”

Ruble Weakens

The ruble weakened 0.7 percent against the dollar to 70.454 as of 7:15 p.m. in Moscow, extending its loss this month to 5.6 percent. Brent crude dropped 3.1 percent to $37.25 a barrel, near a seven-year low.

Other analysts are more skeptical about the outlook for lower borrowing costs. Alfa Bank said Wednesday the central bank may now choose to leave monetary policy alone next year.

“The 11 percent rate has a good chance of remaining unchanged,” Alfa Bank analysts, led by Natalia Orlova, said, citing the price of oil, sanctions against Turkey and higher U.S. interest rates. While a cut might be possible in the second quarter, policy makers may not rush into “premature monetary easing.”

Inflation Goal

Russia’s central bank wants to lower the inflation rate to about 6 percent by the end of 2016 and then to 4 percent in the medium term. The rate stood at 14.8 percent on Dec. 7 with risks increasing, it said on Friday. Rosstat data released Wednesday showed that tomato prices rose 9 percent for the week and cucumbers 6.6 percent ahead of the introduction of limitations on import from Turkey from the New Year.

"I’d estimate the chance of the rate being cut in the first quarter at 20 percent," said Konstantin Artemov, a bond portfolio manager at Raiffeisen Capital in Moscow., who isn’t buying local government debt because it’s “too expensive.” The central bank will be able to lower rates only at the start of the second quarter, he said.

The benchmark Micex Index of stocks rose 0.8 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE