Ruble Sinks With Oil as Bets for Rate-Cut Pause Hit Russia Bonds

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The ruble fell to a four-month low as Brent crude extended losses in a bear market, boosting wagers for Russia’s central bank to limit interest-rate cuts this week to avoid accelerating the selloff.

As the currency weakened as much as 2.4 percent against the dollar, forward-rate agreements showed traders trimming bets for policy easing to the lowest since December. Royal Bank of Scotland Group Plc and Credit Suisse Group AG said the Bank of Russia may opt to keep interest rates on hold on July 31 to avoid exacerbating the ruble’s slump and stoking inflation. Russian bonds decreased for a sixth day.

“Should oil and the ruble continue falling in the coming days, this could reduce room for decisive policy easing” even though the state of Russia’s economy warrants a larger rate cut, JPMorgan Chase & Co. analysts including Anatoliy Shal said in an e-mail to clients.

While all but three of 33 economists polled by Bloomberg project the Bank of Russia will keep reducing borrowing costs from 11 percent as the economy verges on a recession, the ruble’s selloff may “tip the scales in favor of a pause,” according to RBS’s Tatiana Orlova. Russia is caught between trying to bring inflation closer to a central bank target that’s about 11 percentage points lower than current levels and keeping the ruble weak enough to offset the effect of sliding oil prices on government revenue.

Inflation Risks

The ruble declined 1.4 percent to 59.2370 per dollar by 5:17 p.m. in Moscow, the most in emerging markets and bringing this month’s drop to 6.6 percent. That raises the risk that inflation, which fell for a third month in June to 15.3 percent, may start accelerating again.

Yields on five-year government bonds increased 15 basis points to 11.05 percent. Forward-rate agreements signal 19 basis points of interest-rate cuts in the next three months, down from 30 basis points last week.

“Easing of the monetary policy amidst further declines in oil prices and a weaker ruble may put in jeopardy the attainment of medium and longer-term inflation targets,” Credit Suisse economist Alexey Pogorelov said in an e-mailed note.

Orlova, the chief Russia economist for RBS, said the rate decision would be a “litmus test” of the Bank of Russia’s priorities. The economy probably shrank 3.4 percent in the first half, Economy Minister Alexey Ulyukayev said on Monday.

While ruble weakening might not be enough to make the central bank stop rate cuts, it may force it to scale back purchases of dollars that it started in May to replenish its reserves. Policy makers have already bought at least $9.8 billion, according to data on the central bank’s website.

“As for the halt or reduction in dollar purchases, I expect to see it in the next statistics, either tomorrow or on Wednesday,” Yury Tulinov, the head of research at PAO Rosbank in Moscow, said by e-mail.