Putin’s Ruble Warning Puts Goldman Easing Bets on Shaky Ground

  • Doubts creep into scenario also seen by Rabobank, Sberbank CIB
  • Currency depreciation rekindles Nabiullina’s inflation dilemma

The most adamant believers of an interest rate-cutting cycle in Russia that’s driven a bond-market rally are starting to lose faith. And Vladimir Putin’s responsible.

Goldman Sachs Group Inc., Sberbank CIB, Rabobank and seven other forecasters are the minority among 39 who expect policy makers to reduce benchmark borrowing costs for a second month when they meet Friday. Some rate stalwarts are losing confidence in their own predictions after Putin sparked a 5.6 percent drop in the currency by telling his prime minister July 19 to monitor the ruble’s movement as it traded out of step with oil. Traders took the remarks as a sign that interventions might be next.

“The weaker the ruble, the less likely that they will cut,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London, who’s standing by his forecast for a 50 basis-point reduction for now. “The odds of a cut are paradoxically lower than last week when I made the call.”

As the ruble heads for its worst month this year, Bank of Russia Governor Elvira Nabiullina will need to weigh its effect on inflation that’s already starting to creep back to 8 percent, double her medium-term target. That’s likely to prompt her to abandon an easing cycle that has only just resumed while crude trades below $45 a barrel, according to Ivan Tchakarov, chief economist for Russia at Citigroup Inc. in Moscow. The Russian currency extended July declines Thursday, weakening 0.6 percent to 66.335 per dollar by 1:49 p.m. in Moscow.

Tricky Conditions

The central bank reduced its benchmark to 10.5 percent from 11 percent on June 10, driving 10-year yields to a two-year low of 8.24 percent on July 1. The rate is now 8.62 percent, while local-currency government bonds have handed investors a loss of 3.7 percent in dollar terms in July, poised for the worst month since January.

“This is not the right environment to cut rates, with the dip in oil prices and the rise in real wage growth,” Tchakarov said. “They would prefer to err on the side of caution and not cut.”

Traders also see a pause in interest rates tomorrow, with 37 out of 56 in a poll conducted by the Tradition brokerage forecasting no change. Just 13 expect a cut.

‘Sudden Reversal’

Before Putin’s warning, things looked different. The ruble’s 17 percent strengthening versus the dollar was seen as a curb on inflation that had held near a two-year low since March. Oil-price stability was a further impetus for policy makers to deliver stimulus to an economy caught in recession.

"The sudden reversal of fortunes for the ruble poses the main risk for our cut forecast,” said Tom Levinson, chief currency and rates strategist at Sberbank CIB in Moscow.

Levinson expects the central bank to reduce its benchmark 50 basis points Friday and said that it won’t necessarily fan increases in the consumer price index since imports account for a shrinking share. “Given that inflation these days is less sensitive to the ruble, we think it can cut,” he said.

Inaction by the Bank of Russia to ease policy risks attracting speculators to a carry trade bolstered by the second highest rates in emerging Europe, and exacerbating currency volatility, according to Goldman Sachs chief Russia economist Clemens Grafe, who had anticipated more aggressive rate cuts in 2016 than materialized. He predicts policy makers will lower borrowing costs by 50 basis points Friday and at the following three meetings, to end the year at 8.5 percent.

“It’s hard to see what keeping such an overly tight monetary stance is expected to achieve,” Grafe said. “The direction of underlying inflation remains downwards.”

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