Draghi Betrayed by CPI as Russian Rally Seen Short-Lived
The fastest inflation in 33 months is diminishing prospects for Russian interest-rate reductions, threatening to cut short a rally in Russian government bonds.
Securities known as OFZs surged since European Central Bank President Mario Draghi announced unprecedented euro-region stimulus on June 5, extending gains over the past month that were driven by easing tensions with Ukraine. While Bank Rossii raised interest rates by 200 basis points this year to shore up the ruble, above-target inflation is set to keep policy makers from cutting borrowing costs anytime soon, according to Alexander Losev of Sputnik Asset Management.
“The ECB decision was just the last cherry on the cake for OFZs,” Losev, Sputnik’s chief executive officer, said by e-mail from Moscow June 6. “When the positive news on Ukraine is priced in, people will remember about the economy, inflation and interest rates.”
The yield on OFZ debt due February 2027 slid 25 basis points to a three-month low in the two days after the ECB measures, designed to boost credit and spur inflation in the euro area, Russia’s biggest trading partner. Ruble notes made 6.9 percent in dollar terms since the end of April, the best showing among 56 nations in the Bloomberg Emerging-Market Local Sovereign Index.
The country’s consumer price index rose 7.6 percent in the 12 months to May, data from the Federal Statistics Service showed last week, the fastest pace since 2011 and higher than the central bank’s 5 percent to 6 percent target. The weaker ruble has contributed to price growth by boosting the cost of imported goods.
The yield on Russia’s government ruble debt due 2027 tumbled 88 basis points in May to 8.55 percent. It rose 10 basis points today to 8.52 percent at 1.48 p.m. in Moscow. The country’s borrowing-cost advantage compared with similarly rated Brazil increased to 373 basis points from a 10-week low of 296 in April, data compiled by Bloomberg show.
The central bank will probably leave its key one-week repurchase rate on hold at 7.5 percent at its next meeting on June 16, according to a Bloomberg survey of economists. Inflation may accelerate to as much as 8 percent in June, Interfax cited the Economy Ministry as saying June 6.
“Inflation may decelerate in the second half of the year, but the medium-term level of 4 percent the central bank is targeting will be very hard to achieve,” Dmitriy Gritskevich, analyst at OAO Promsvyazbank, said by e-mail. “In this respect, our base case is no cuts this year.”
Russia’s annexation of Crimea and escalating unrest in eastern Ukraine led the U.S. and the European Union to impose asset freezes and travel bans on 98 people and 20 companies, while stopping short of broader curbs on investment and trade. Russia saw $50.6 billion in net capital outflow in the first quarter and the economy grew 0.9 percent in the period after a 2 percent gain in the previous quarter.
Pacific Investment Management Co. has been “quite actively accumulating Russian assets after the crisis in Ukraine,” Philippe Bodereau, PIMCO’s London-based global head of financial research, said in interview in Hong Kong today.
While the ruble has rallied 2.5 percent this quarter against the dollar, it remains 4.2 percent weaker this year, the worst performance among 24 emerging-market currencies tracked by Bloomberg after Argentina’s and Chile’s peso.
“High political risks in the Russian segment still limit the inflow of foreign money,” Kirill Sychev, an analyst at Bank Zenit in Moscow, said by e-mail. “The impact of the ECB’s decision on the ruble will become noticeable as the geopolitical situation calms down.”
The ECB lowered its deposit rate to minus 0.10 percent and its benchmark to a record 0.15 percent. It created a 400 billion-euro ($546 billion) loan program to incentivize banks to lend and extended the practice of granting them as much cheap cash as they want until the end of 2016.
Russia’s local-currency 10-year notes climbed in the past five weeks, sending yields down the most among 22 emerging markets monitored by Bloomberg.
“OFZs are getting more and more expensive, which deepens the potential correction,” Gritskevich of Promsvyazbank said.
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