The Bond-Market Metric Signaling Analysts Wrong on Russian Rate

  • Yield-rate gap as wide as run up to 100-bp easing last June
  • `No excuse not to cut' says Nordea, breaking consensus view

Bond traders are betting Russian policy makers will make good on a promise to resume interest rate cuts after wrestling down inflation.

They’ve pushed government bond yields down 142 basis points from this year’s high in January, opening up a disconnect with the central bank’s benchmark rate unrivaled since the weeks leading up to a one percentage-point reduction on June 15, followed in late July by a further half a percentage point. The case for ending a six-month pause is getting stronger after annual inflation almost halved since August and the ruble rebounded 18 percent since touching a record low on Jan. 21.

“Inflation has come down and that gives them no excuse not to cut rates this time," said Anders Svendsen, an economist at Nordea Bank AB in Copenhagen, who anticipates a 50 basis-point reduction to 10.5 percent when the Bank of Russia meets on March 18. The forecast of Nordea, the most-accurate predictor of Russian rates in the past two years after Raiffeisen Zentralbank Oesterreich AG, contrasts with a Bloomberg survey of eight economists that so far see no change in policy next week.

For central bank chief Elvira Nabiullina, offering stimulus to an economy that’s been shrinking since the first quarter of 2015 is getting much easier than when she last convened rate-setters on Jan. 29. Just a week before, the ruble had slumped to 85.999 per dollar for the first time, threatening her target to reduce inflation to no higher than 4 percent by late 2017. That prompted the central bank to omit an easing pledge from a statement accompanying its decision, instead hinting that rate increases may be on the cards.

The warning seems to have gone unheeded by the bond market taking its cue from consumer-price growth. The yield on notes due April 2021 dropped 44 basis points last week after data showed inflation fell to a 17-month low of 8.1 percent in February, slower than any of the 15 economists surveyed by Bloomberg had predicted. That brought the discount to the 11 percent benchmark borrowing rate to 164 basis points. The five-year note yielded 9.53 percent at 5:58 p.m. in Moscow.

"Inflation is coming down faster than we had anticipated," said Svendsen. "If we see inflation continuing at this low level for the next few months, I think we will see more rate cuts."

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