Ruble Pares Third Weekly Drop After Central Bank Cuts Key Rate

  • Nabiullina’s rate reduction of 25bps marks slower easing
  • Bonds retreat after Bank of Russia says will keep tight policy

Russia’s ruble pared a third weekly drop while bonds fell as the central bank slowed the pace of easing with a 25 basis-point cut in its main interest rate amid an escalation of tensions with the U.S. and a drop in oil.

The currency traded 0.4 percent higher at 57.67 per dollar as of 4:39 p.m. in Moscow, paring a weekly drop to 1.1 percent. Government bond yields climbed to the highest level in a month as the Bank of Russia reduced its key rate to 9 percent and said it may pause rate cuts but sees scope for more in the second half.

“This decision was correct given the multitude of external risks facing Russia,” said Ivan Tchakarov, an economist at Citigroup Inc. “It will contain the downside risks to the ruble, rather than help extend the rally, given the fact that the ruble should indeed be weaker relative to macro fundamentals.”

Analysts have been stepping up calls for the ruble to weaken after a 6 percent rally this year caused it to break its historical link with oil, Russia’s main export earner. The country’s markets have come under further pressure this week after the U.S. Senate voted to increase sanctions on the country and give Congress the power to review any attempt by President Donald Trump to lift them unilaterally.

Read more on the Senate’s vote to increase sanctions on Russia

Central bank Governor Elvira Nabiullina said in a press briefing after the rate decision that she doesn’t see a significant market impact from tougher sanctions against Russia, while any move to restrict foreigners from holding government bonds would hurt international investors more than Russia. The bill passed by the U.S. senate doesn’t include restrictions on sovereign debt or derivatives, but orders a report on what impact such limits might have.

Foreign investors attracted by Russia’s high interest rates have increased their share of Russian local-currency government bonds to 30 percent this year, a record high. The bonds have handed investors returns of 11.7 percent, compared with a 6.3 percent average for emerging-market local-currency debt.

The yield on ruble notes maturing in five years climbed five basis points to 7.93 percent on Friday, the highest level since May 29. The Micex Index of stocks pared an earlier gain after the rates decision, advancing 0.6 percent. It dropped to a 16-month low on Thursday amid the sanctions risk.

Nabiullina’s pledge to keep monetary policy moderately tight won’t curb appetite for ruble bonds because the central bank is “still in easing mode,” according to Dmitri Barinov, a portfolio manager at at Union Investment Privatfonds GmbH in Frankfurt.

“The central bank keeps real yields attractive, so everybody wants to stay in,” he said.

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