What indicators do debt market participants focus on?

The Bank of Russia raised the key rate by 100 basis points, to 13%. This step alone, as the regulator itself notes, may not be enough to curb inflation, and therefore the rate increase may continue. Analysts allow its growth to 13.5–14%. The duration of maintaining tight monetary policy will depend on the speed with which the regulator manages to combat inflation.

One Hundred Key Points

On Friday the Bank of Russia raised the key rate by 100 basis points (bp) to 13%, the highest since May last year. However, a number of analysts did not rule out a stronger increase – by 200 bps. At the final press conference, the head of the Central Bank, Elvira Nabiullina, said that in order to return inflation to the target value of 4% by the end of 2024, a long period of tight monetary policy (MCP) will be required. In addition, she noted that during the meeting three options were considered: maintaining the key rate, or increasing it by 100 bps. n. and a stronger increase.

The rate increase and the regulator’s comments affected the debt market. The yield on short-term securities rose by 19 bp on Friday. p., up to 12.1–12.3% per annum. At the same time, rates on longer-term securities mostly fell.

The yield on medium-term OFZs decreased by 4 bp. p., up to 11.7–12% per annum. The yield on long-term securities dropped by an average of 5 bps. p., up to 11.6–11.7% per annum. As a result, the inversion of the yield curve, in which rates on short-term securities exceed rates on long-term securities, expanded over the week from 22 to 45 bp. p. This indicates that the market is not expecting a long-term rate increase.

Unfinished fight

At the same time, analysts do not rule out several more increases before the end of the year, as evidenced by the Central Bank’s new forecast for inflation and the key rate. Thus, the inflation forecast at the end of the year was raised from 5–6.5% to 6–7%, and the key rate to 13–13.6%. “The Central Bank’s further steps will depend on the inflation trajectory and, in general, the speed of the transmission mechanism: how quickly the economy reacts to the past key rate increases. Thus, the main indicators for the Central Bank will remain the dynamics of consumer prices and inflation expectations, the growth rate of lending and final demand,” notes Vladimir Evstifeev, head of the analytical department of Zenit Bank.

Sovcombank predicts an increase in inflation this year from the current 5.5% to 7.2%. Therefore, they do not rule out raising the key rate to 13.5–14%. In such conditions, rates on the debt market will continue to rise. According to Sovcombank chief analyst Mikhail Vasiliev, the nearest benchmark for the near end of the OFZ curve may be the current level of the key rate of 13% (with the prospect of growth to 13.5–14% per annum). Long-term OFZ yields may rise to 12% per annum (with the prospect of growth to 12.5–13% per annum).

Oblique formations

In its policy, the Central Bank will focus not only on inflation, but also on pro-inflationary factors, namely the ruble exchange rate and the rate of lending to the economy. The latter will depend, among other things, on the slope of the OFZ curve, from which credit and deposit rates throughout the economy are measured. According to Mikhail Vasiliev, inversion of the OFZ yield curve may be one of the goals of the Bank of Russia in order to cool lending and demand in order to return inflation to the target level.

“The greater the inversion, the lower the attractiveness of lending for banks. Banks attract short-term liabilities at the key rate, while the reference rate for assets (loans) is long-term OFZs,” explains Mr. Vasiliev. A decrease in lending will inevitably affect inflation and inflation expectations, which will allow the regulator to soften first the rhetoric and then monetary policy.

Large market players will be among the first to react to changes in the mood of the Bank of Russia. This will result in a more rapid fall in the rates of short-term securities and will lead the yield curve to a standard form, in which the rates of such OFZs will be inferior to the rates of longer-term securities.

But as Alfa Capital portfolio manager Alexey Kornev notes, the expectations of the main market participants may not coincide with the view of the Central Bank.

Vitaly Gaidaev