Russian Orthodox Policy at Turning Point as Easing Bets Soar

  • Bond discount signals more than 200 basis points of rate cuts
  • Ultra-conservative central bank will finally deliver: Goldman

The bond market has a message for Bank of Russia Governor Elvira Nabiullina: your lending costs are out of kilter with reality.

Days before Nabiullina convenes policy makers to decide on rates, the bond market is showing the widest disconnect between yields and the central bank benchmark since April 2015, at the height of the last easing cycle.

While 13 of 16 economists surveyed by Bloomberg predict she will lower the key rate by 50 basis points to 10 percent on Sept. 16, yields suggest the rate should be closer to 8 percent. The gap between reality and market pricing shows growing confidence that monetary policy will finally catch up with inflation that’s fallen to a two-year low, giving policy makers the luxury to add stimulus to an economy in recession.

Russia’s central bank, which “has shown repeatedly that it prefers to be extra conservative,” is now at a turning point, according to Goldman Sachs Group Inc.’s Moscow-based analysts Clemens Grafe and Andrew Matheny. Their forecast for 450 basis points of rate cuts over the next four quarters is among the most bullish.

Bond traders agree: they’ve sent yields to levels that predate the start of the Crimea conflict and ruble crisis of 2014, propelling gains of about 25 percent on local-currency OFZs this year, third-most after Brazil and South Africa, according to Bloomberg index data. Notes due February 2027 rose for a fourth day, pushing the yield down eight basis points to 8 percent by 5:32 p.m. in Moscow.

Inflation Zeal

At every meeting this year except one, on June 10, oil’s inflationary pull on the ruble caused Nabiullina to refrain from easing, earning her the title of Europe’s most-orthodox central banker for her devotion to price-growth targets. By the Bank of Russia’s own measures, those pressures have abated: it said Sept. 1 inflation will decelerate further after dropping to 6.9 percent in August, compared with a medium-term target of 4 percent.

"The market is looking for a more radical rate cut, or a series of cuts,” said Alexander Losev, chief executive officer of Sputnik Asset Management in Moscow, who has been selling longer-dated debt to pocket gains because he doesn’t think yields have room to fall further.

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