Market commentary: Inflation remains rampant in Russia, European bonds fall

Russia’s central bank will probably maintain its current pace of monetary easing, looking past rouble gains to keep control of the currency’s fastest price growth in 13 years. The Bank of Russia will most probably reduce its benchmark interest rate to 13 percent from 14 percent, according to 26 of 40 economists surveyed by Bloomberg. Nine analysts predict a decrease of 150 basis points and five see a two-point cut. The regulator will announce the decision tomorrow.

Governor Nabiullina is rolling back December’s emergency increase to 17 percent as policy makers are trying to walk the line between reviving the recession-bound economy while blunting the risk of rouble instability and faster inflation. The world’s best-performing currency this year has partially recouped losses after a crash in oil prices and sanctions over Ukraine stoked its worst crisis in 16 years.

A significant rate cut would contradict the regulator’s inflation target as that may spur sharp rouble weakening and limit a slowdown in inflationary expectations. Sharp monetary easing will be a negative sign for foreign investors, indicating there won’t be further cuts in the near future.

The central bank cut the benchmark by a percentage point last month after delivering a surprise two-point reduction in January. Consumer-price growth, which polls indicate is one of the main concerns for Russians, accelerated to 16.9 percent in March from a year earlier. The central bank, whose medium-term inflation target is 4 percent for 2017, estimates price growth will ease to 9 percent next March as the economy cools.

The rouble’s strength is contributing to a slowdown in inflation, and according to Governor Nabiullina the rouble is in a more or less balanced situation. The Russian currency has gained 18 percent against the dollar this year after losing almost half of its value in 2014.

The world’s biggest energy exporter is entering its first recession in six years after gross domestic product gained 0.6 percent in 2014. While the Economy Ministry improved its growth forecast for this year, estimating GDP will decline 2.8 percent, the central bank sees a contraction of as much as 4 percent.

A stronger currency can hurt the competitiveness of Russian exporters and cut into budget proceeds. While the Bank of Russia has said that rouble gains don’t pose a threat to financial stability, it’s curbed the supply of cheap dollars to lenders by raising the cost of borrowing foreign currency through its operations three times since the end of March. The measure spurred the rouble’s worst stretch of losses last week.

Current market developments

The Stoxx Europe 600 Index tumbled 1.5 percent yesterday amid losses in health-care shares and some disappointing earnings. Barclays Plc was little changed after posting first- quarter profit Wednesday that matched analysts’ estimates.

U.S. equity-index futures retreated this morning and the dollar was little changed before the Federal Reserve decides monetary policy. The Standard & Poor’s 500 Index futures declined 0.2 percent in early trading and the Nasdaq 100 Index dropped 0.3 percent.

The Stoxx Europe 600 Index was little changed as the bond yields climbed across the region. Indonesia’s main equity gauge plunged the most since 2013, helping drag the MSCI Emerging Markets Index to a 0.6 percent drop.

Mixed economic data prompted economists to push back estimates for when the Fed will lift rates for the first time since 2006 leading to a weakening of the dollar to $1.0981 against the euro following a four-day, 2.4 percent surge. Gold held near a three-week high, trading at $1,208.97.

The U.S. central bank will comment on policy later today, while Thailand unexpectedly cut rates. Japanese markets were closed for a holiday.

Better-than-estimated U.S. corporate earnings have also helped the Standard & Poor’s 500 Index up 2.3 percent this month. Twitter slid 18 percent, the most since February last year, after revenue fell short of estimates in the first quarter, even after the company introduced new products and tweaked features to attract more people.

This article was issued by Simon Psaila, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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