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By Bloomberg

While ruble bond yields are signaling that Russian interest rates are destined to fall, investors seeing them as a sign of imminent cuts may be overly optimistic.

Yields on five-year notes have mostly been below the central bank’s 17 percent key rate since Governor Elvira Nabiullina raised it last month to shore up the ruble. The gap reached 230 basis points on Jan. 23, the widest since she unexpectedly hoisted the benchmark by 6.5 percentage points on Dec. 16.

Inflation will prevent policy makers from easing as soon as this week after prices spiraled to a five-year high in December, and may keep accelerating to about 15 percent in the second quarter, according to ING Groep NV. With the ruble losing almost half of its value against the dollar last year, and the economy facing a recession amid plunging oil revenue and sanctions, high borrowing costs are compounding challenges for restoring growth.

“Rates will indeed be significantly lower in the foreseeable future,” Vladimir Osakovskiy, the chief economist in Moscow for Bank of America Corp., said by phone on Jan. 22. “The main question is when? We see April the soonest. The central bank will start cutting rates only when inflation shows a definitive slowdown.”

Derivative traders have pared bets on lower borrowing costs, with forward-rate agreements signaling at least 200 basis points of reduction in the next three to six months. That’s less than a forecast of 390 basis points in cuts on Jan. 12 and compares with a 430 basis-point jump in the key rate predicted on Dec. 9, a week before Nabiullina’s emergency increase.

Ruble Rebound

The ruble advanced 1.5 percent against the dollar last week, posting its first weekly gain in 2015. That trimmed this month’s loss to 4.7 percent, following a 46 percent slide in 2014. The currency weakened 2.2 percent by 11:41 a.m. in Moscow to 65.67 per dollar.

While the Bank of Russia’s decision last month helped stabilize the foreign-currency market, inflation expectations are still high, Nabiullina said in e-mailed comments on Jan. 21.

Consumer prices will probably peak at 11.4 percent in the first quarter before slowing to 8.5 percent by year-end as effects of the currency depreciation ease, analysts said in a Bloomberg survey. The economy will contract 3.5 percent this year, another survey showed.

Policy makers will keep their benchmark rate unchanged when they meet on Jan. 30, according to all but one of 18 estimates in a Bloomberg survey of economists. One analyst predicted a 200 basis-point reduction.

Putin Warning

The meeting will be the first after the central bank named Dmitry Tulin as head of monetary policy on Jan. 14, following President Vladimir Putin’s criticism that the regulator didn’t react quickly enough to the currency crisis. Tulin, a deputy head of the central bank after the Soviet Union fell in 1991, replaced Ksenia Yudaeva in the bank’s biggest leadership reshuffle since Nabiullina took charge in June 2013.

“There will be new people, but the governor is still the same, so there shouldn’t be any radical changes,” Ivan Guminov, a money manager at Ronin Trust in Moscow, said in e-mailed comments on Jan. 22. “They can lower the rate by 1 percentage point, that’s what one can hope for at best.”

Russian markets still remain volatile and subject to external influences, Guminov said. While the ruble has bounced back, there’s still a war in eastern Ukraine and a looming Standard & Poor’s review of Russia’s sovereign rating due by the end of the month, he said.

Bank of America’s Osakovskiy predicted rates will fall by 600 basis points this year. Goldman Sachs Group Inc. said the key rate will drop by 400 basis points from late in the third quarter until year-end, according to an e-mailed note on Jan. 15.

Bond Markets

The yield on Russia’s five-year bond has declined 386 basis points since the emergency rate increase more than a month ago to 14.7 percent on Friday.

Investors have already started pricing in slowing inflation as they did in Turkey, according to Dmitri Barinov, who oversees $2.6 billion of emerging-market bonds as a money manager at Union Investment Privatfonds GmbH in Frankfurt.

Faced with accelerating inflation and a currency tumbling to successive record lows, Turkish policy makers raised their one-week repurchase rate 550 basis points to 10 percent in January last year. After inflation peaked in May, the yield on five-year notes dropped 175 basis points to 7.05 percent on Jan. 19, a day before the central bank cut its key rate by 50 basis points in its fourth reduction since the increase a year ago.

“The bond market priced it in already” in Turkey, Union Investment’s Barinov said by e-mail on Jan. 22. “The same thing in Russia would absolutely make sense.”