Russia Bonds Rally as ING Sees Tame Inflation Renewing Rate Cuts

Updated on
  • Aricapital’s Tretyakov says inflation target now in reach
  • Central bank forecast to cut benchmark to 10% on Sept. 16

Russian government bonds extended gains for a fifth day with yields declining to the lowest since early 2014 as slowing inflation spurs confidence the central bank will cut rates next week.

Yields on debt known as OFZs due February 2027 fell seven basis points to 7.95 percent as of 6:30 p.m. in Moscow, capping a 27 basis-point decline in the last five sessions. The ruble strengthened for a fifth day, rising 0.7 percent against the dollar, as Brent crude soared 3.7 percent after data showed U.S. oil supplies tumbled the most since 1999.

Russian bonds are outperforming peers in developing Europe in 2016 as stabilizing oil prices set the stage for the world’s biggest energy exporter to exit recession. At the same time, the central bank has managed to curb price growth which will give it room to spur the economy through lower borrowing costs. Alexey Tretyakov, money manager at Aricapital Asset Management in Moscow, said the central bank’s medium-term inflation target of 4 percent is now within reach.

"The key to what’s happening is the decline in inflation expectations," Tretyakov said. Investors "have almost believed in the central bank’s promise."

OFZ yields could fall to as low as 7 percent next year if the central bank halves its lending rate, Tretyakov said. Eighteen out of 22 analysts surveyed by Bloomberg forecast policymakers will reduce the key rate, now at 10.5 percent, by 50 basis points when they next meet on Sept. 16.

Easing Pledges

The Bank of Russia is finally able to deliver on easing pledges with inflation running at 6.7 percent, the slowest in two years, according to Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow.

"The continuation of such favorable price trends only strengthens our confidence in a rate cut to 10 percent," Polevoy said in a note to clients.

At every meeting this year except one, on June 10, the central bank held back from rate cuts as oil’s inflationary pull on the ruble overshadowed the need for stimulus. By the Bank of Russia’s own measures, those pressures have abated: it said Sept. 1 inflation will decelerate further.