October 31, 2019 / 1:09 PM / 12 days ago

Russia likely to cut key rate to 6% in 2020, rouble seen easing: Reuters poll

MOSCOW (Reuters) - Interest rates in Russia are expected to fall lower in 2020 than previously forecast, while the rouble is expected to weaken over the next year, a monthly Reuters poll showed on Thursday.

The central bank is likely to cut its key interest rate to 6.25% in the fourth quarter of 2019, according to a consensus forecast of 22 analysts and economists polled in late October.

The next rate-setting meeting is scheduled for Dec. 13 RUCBIR=ECI.

The previous poll published, in late September, predicted that the central bank would lower the key rate to 6.75% in the fourth quarter this year and to 6.50% in the fourth quarter of 2020.

Market expectations have changed after the central bank carried out its sharpest rate cut in more than two years this month. Now its key rate, which defines the cost of borrowing in Russia, is expected to reach 6% by the end of 2020.

The rouble benefited from the latest rate cuts by the central bank as expectations the rate would go lower made Russian bonds more attractive assets.

Yields on 10-year OFZ treasury bonds, which move inversely with their prices, fell to 6.35%, their lowest since 2008, earlier this month RU10YT=RR.

The rouble was also supported this year by carry trade operations in which investors borrow low-yielding currencies, such as the U.S. dollar, and convert them into roubles to buy high-yielding rouble-denominated bonds.

“Yet, inflows into Russia’s local debt by foreigners have been significant, fueled by stable macro indicators and rate cut prospects,” said Vladimir Miklashevsky, senior economist and trading desk strategist at Danske Bank.

But the central bank is expected to end its monetary easing cycle, so the rouble is likely to lose some support from the gap between interest rates in Russia and abroad.

“With the dovish Central Bank of Russia, the rouble’s carry trade attractiveness continues to vanish,” Miklashevsky said.

The rouble outlook has worsened from a month ago. It’s expected to trade at 66.00 to the dollar and 75.70 to the euro 12 months from now. The previous poll foresaw exchange rates of 65.60 and 74.40, respectively.    

Most of the forecasts in the Reuters poll were based on at least 10 individual projections.

On Thursday, the rouble’s official exchange rates, set by the central bank, were 63.87 per dollar and 71.00 per euro. The Russian currency gained support from the U.S. Federal Reserve’s decision to cut its key interest rate by 25 basis points to 1.50% the day before.

Economic growth forecasts for this year have not changed from a month earlier. Experts predicted that Russia’s oil-dependent economy would expand by 1.1% in 2019 versus a call for 1.0% growth in late September, down from 2.3% in 2018.

(This story corrects bond yields low level to 2008 from 2013 in 7th para, no other changes to text)  

Additional reporting by Elena Fabrichnaya; writing by Andrey Ostroukh; editing by Larry King

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