Russian Bonds Drop as Rate Cut Disappoints Traders; Ruble Falls

Russian bonds retreated as the central bank lowered interest rates less than some traders predicted while the ruble followed oil lower, extending its first weekly decline in more than a month.

So-called OFZs fell, sending yields higher, after central bank Governor Elvira Nabiullina lowered borrowing costs by 100 basis points to 14 percent. While the move was in line with the median forecast in a Bloomberg survey of 32 analysts, more than half the currency, rates and bond traders polled by the Tradition brokerage predicted cuts of at least 150 basis points. The ruble fell 0.5 percent to 61.47 per dollar by 6:34 p.m. in Moscow.

“The market had expected a bigger rate cut and as a result OFZ yields jumped,” Alexey Demkin, head of research at Gazprombank in Moscow, said by e-mail on Friday. “The oil-price dynamic isn’t favoring Russian assets today.”

While the ruble retreated 1.7 percent this week, it has shown resilience to rate cuts, gaining 13 percent since the last reduction in January. That’s the only advance among 24 emerging-market currencies tracked by Bloomberg as policy makers outside the U.S. lower borrowing costs to support growth while the Federal Reserve moves closer to raising rates.

The appreciation has given Nabiullina space to further unwind a 650 basis-point emergency rate increase to 17 percent in December as the economy heads for recession.

The yield on the government’s January 2028 OFZ bonds rose for the first time in three days, increasing 25 basis points to 12.90 percent.

Stocks Fall

The dollar-denominated RTS Index of stocks decreased 3 percent to a one-month low of 833.57. Oil, Russia’s main export earner, fell 1.8 percent to $56.03 a barrel in London, extending its second weekly retreat.

VTB Group dropped 1.8 percent in Moscow. Russia’s second-biggest lender faces significant losses this year as high interest rates drag the economy into a slump, said Deputy Chief Executive Officer Herbert Moos. Profit last year was almost wiped out, dropping to 4.1 billion rubles ($67 million) from 101.5 billion rubles in 2013, the Moscow-based lender said Friday.

The Bank of Russia is slowing the pace of cuts following a surprise 2 percentage-point reduction in January. Annual inflation accelerated to 16.7 percent in February, the fastest pace in 13 years. Even with price growth more than four times its mid-term target, the regulator is answering calls from business for lower rates to buoy an economy poised to shrink 4 percent this year, according to economists surveyed by Bloomberg.

Rate Outlook

“The current monetary policy and low economic activity will be conducive to the slowing of annual consumer-price growth,” the central bank said in the statement. “As inflation risks abate, the Bank of Russia will be ready to continue cutting the key rate.”

Forward-rate agreements compiled by Bloomberg showed expectations for a 140 basis-point rate cut in benchmark borrowing costs in the next three to six months, down from 158 basis points on Thursday.

“Many brokers were expecting a bigger cut of 200 or even 300 basis points, so it is a neutral to slightly ruble-friendly decision,” Dmitri Barinov, a money manager who oversees $2.6 billion of emerging-market bonds at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail on Friday. “It’s a smaller cut probably because inflation surprised on the upside lately and the central bank prefers ruble stability.”

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