Markets had fully priced one 25bp rate cut, with an additional 25bp cut only partially priced in.
Benign inflation and a stable ruble favour local debt, upcoming rate cuts should drive bond yields lower. The relatively high oil price should continue to boost investor sentiment while the system of FX interventions under the fiscal rule reduce the volatility of the ruble. Headline inflation has stabilised in recent months and core inflation trends remain downward. Breakeven inflation has fallen further over the past month. We expect the CBR to deliver two 25bp rate cuts before the end of the year underpinning our favourable view of local debt.
CBR cut rates by 25bp on 14 June, 26 July and 6 September. We closed the trade on 23 September for a gain of 9%. 7% of the return was generated from the 85bp fall in yield, with a 2% contribution from the currency.