Market participants’ inflation expectations level out close to target

Russian financial markets remained steady throughout June as market participants’ inflation expectations kept close to the Bank of Russia's target. Money market rates tracked the regulator’s key rate path, while the ruble exchange rate dynamics were consistent with fundamental factors and the drop in non-residents’ investment into government securities had but little impact on their yields, according to the 16th issue of ‘Banking Sector Liquidity and Financial Markets’, a BoR commentary.

Although the June downgrade in the BoR key rate was below market participants’ expectations, their projections for the key rate at the end of the year were essentially unchanged. OFZ-IN quotes-based inflation expectations were also close to the Bank of Russia’s target level.

The weakening of the ruble was not excessive. A number of external economic and political factors combined to trigger a weaker exchange rate, namely lower oil prices, growing geopolitical tensions and reduced demand of foreign investors for Russian assets. Meanwhile, the ruble’s volatility was fairly low.

Reduced non-residents’ demand for OFZ, against a backdrop of growing geopolitical tensions, helped their yields grow. As a result, government securities became more attractive to banks. The rise in lenders’ demand helped sustain OFZ prices, leading their yields to fall only at the end of June.