Russian financial markets: stability drives down inflation expectations

Russian financial markets performed fairly steadily in May. The banking sector retained a structural liquidity surplus, with the money market interest rates moving close to the Bank of Russia key rate. The ruble proved fairly resilient to external economic and political pressures, while market players’ inflation expectations were declining. These are the findings of the 15th issue of the ‘Banking Sector Liquidity and Financial Markets’ commentary .

Market players’ expectations as to projected inflation derived from OFZ-IN bond quotes were lowered to the Bank of Russia’s target level in May.

The month saw a recovery in foreign investors’ demand for Russian OFZ bonds, following its substantial decline in April. Yields on long-term bonds, favoured by foreign investors, remained unchanged, while short-term and medium-term bond yields rose.

The month was marked by Russian investors’ noticeable preference for corporate bonds, as a result of the relatively strong yields of domestic companies’ and banks’ bonds. In May, several major players on the OFZ bond market pared back their purchases and ramped up corporate bond investment, which resulted in the incomplete placement of OFZ bonds at Finance Ministry auctions.