Russia Bonds Gain After Central Bank Ends 11-Month Easing Hiatus

Russia’s central bank cut its main lending rate on Friday for the first time in nearly a year, signaling confidence that inflation risks are declining and describing an economic recovery as “imminent”. After having recently spent billions of dollars per day to support the ruble in a flexible trading band that limited swings in the currency, the Bank of Russian Federation ended its unlimited daily interventions to avoid speculation against the currency. The ruble weakened 0.4 percent to 64.5700 per dollar at 3:30 p.m.in Moscow.

The central bank cut the key rate by half a percentage point to 10.5% after leaving it unchanged for six successive board meetings.

“The Board of Directors notes positive process of inflation stabilization, decline of inflation expectations and inflation risks amid signs of an approaching phase of growing recovery”, the bank’s report said, TASS reported.

The rise in oil prices and the strengthening of the ruble by about a quarter since January will fuel calls from many in government for the central bank to cut its main interest rate for the first time since last summer to breathe some life into Russia´s recession-hit economy. Considering the decision just made and retaining the current monetary policy stance, the annual inflation will be less than 5% in May 2017 to reach the 4% target in late 2017.

“After the rise in uncertainty and risks at the start of this year, the situation in the economy is normalizing”, central bank governor Elvira Nabiullina said at a news conference after the decision.

Russian Federation has been hit by a downturn that began in late 2014 amid falling oil prices and Western anti-Russia sanctions. Policy makers will “consider the possibility” of further easing if inflation is in line with forecasts and based on estimates of risks to price growth, the central bank said.

The ruble strengthened to around 63.40 against the dollar – its best since November – and 72.27 to the euro before weakening back slightly.

It reduced its inflation forecast to 5 percent to 6 percent at year-end and upgraded its projection of economic growth in 2017 to 1.3 percent.

Russian Federation is gearing up for parliamentary elections in September that will test how resilient support for the authorities is in the face of growing economic woes.

“Markets see starting of the monetary easing cycle as positive for economic growth”, said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki.

It marked the first reduction in interest rates in a year. Inflation may get a boost from budget spending, higher pensions and salaries as well as from external risk.

“All in all, it appears to us that the (central bank) decision was dictated by market trends rather than by improvement in internal fundamentals”.