Russian Central Bank expects a stronger ruble and lower interest rates moving forward
This article originally appeared at Forbes
Russia’s ruble is done with the 70s, according to the Central Bank governor Elvira Nabiullina. While she didn’t give a target range for the ruble, she said this weekend on Rossiya-24 TV that the ruble would not devalue much in the near-term.
Much of this depends on oil’s direction. With oil futures pushing into the $50s of late, the ruble has gone from the high 60s to 61 rubles to the dollar on Friday’s close. A stronger ruble is good for Russian local currency bond holders who get the high yield plus a pop in the currency as it strengthens against the greenback. Those who believe the ruble will strengthen may want to consider Russian fixed income.
Over the last two weeks, fund flows have returned to emerging markets. But Russia is the laggard for capital flow due to Western sanctions, a negative political perception, and more importantly, the loss of investment grade status — which keeps funds that are mandated to buy investment grade debt only — far from Russia’s bond market.
Last week, Barclays said that it expects the Russian Central Bank to lower interest rates next year. This is potentially good news for equities, and for current fixed income holders. Investors holding onto higher yielding Russian debt today will see their bond prices rise as yields compress. BarCap said it expects inflation to fall by more than 50% next year from 15% now to 7% in 2016.
Then on Saturday, Nabiullina told reporters during a trip to Lima that inflation will fall another 50% by 2017.
“We are retaining our goal at 4% for 2017. For the following year our [inflation] forecast is 5.5-6%. We think that this goal is achievable without excessive downward pressure on the economy,” Nabiullina told reporters. Her goal is still not on par with the official numbers released on Wednesday by the Russian Ministry of Economic Development. They reduced the baseline forecasts for inflation for 2016 and 2017 to 6.4% and 6% respectively. The Russian economy has been in recession all year, expected to contract by 3.5% in 2015. Global oil prices and sanctions have not helped. The ruble has lost over half its value over the last 10 months and consumer sentiment is near an all time low.