Bank of Russia Vindicated as Bonds Signal Price-Growth Slowdown

  • Bonds’ breakeven rate drops to record-low 5.58 percent
  • Investors optimistic on CPI target after 2 weeks of deflation

Bond investors are showing their faith in the Bank of Russia.

A debt-market gauge reflecting inflation expectations has fallen to a record low as two straight weeks of deflation spur wagers that Governor Elvira Nabiullina will meet her targets for consumer-price growth.

The so-called breakeven rate -- the yield difference between Russia’s only inflation-linked bond due August 2023 and similar-maturity fixed-coupon notes -- dropped to 5.58 percentage points on Tuesday. The latter securities have rallied this quarter as consumer-price data underpin the case for monetary easing, sending yields down more than a half percentage point to 8.48 percent.

The slowdown is vindicating Nabiullina’s decision to abandon interventions at the peak of Russia’s market turmoil in 2014 and switch to a free-floating exchange rate, making the fight against price growth the central bank’s main task. The consensus forecast for the inflation rate in 2017 has shrunk to 5.55 percent from as high as 6.5 percent at the start of the year. That’s still above the central bank’s 4 percent target.

Investors "believe that the central bank will succeed in bringing inflation down to levels where it has basically never been," said Dmitry Dudkin, head of fixed-income research at UralSib Financial Corp. "It means that the ruble free-float and inflation targeting are yielding first results and the central bank’s credibility is improving."

Bank of Russia is due to report its latest weekly inflation data later on Wednesday.

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