If there’s one thing that central banks like, it is being independent. But EM central bankers’ decisions are currently being made with the influence of their developed economy counterparts looming large over them.
Many central banks in emerging markets are still in easing mode. The People’s Bank of China cut rates by 25 basis points, effective March 1, while a few days later India made the second of two cuts this year outside its normal meeting cycle. But with the dollar soaring, the Fed apparently still on track to raise rates for the first time in June, and the market’s attention focusing on the large stock of dollar-denominated corporate debt issued by emerging markets, further cuts are likely to get riskier as time goes on. Read more
Unexpectedly early interest rate cuts in India, Peru and Egypt on Thursday indicate that falling oil prices and gathering disinflationary pressures are accelerating a cycle of monetary easing in many emerging market economies, analysts said on Friday.
The easing in key EM economies – added to expectations that several more countries will also cut rates – stands in stark contrast to a recent market consensus that 2015 would herald upward pressure on EM rates as the US Federal Reserve espoused a tighter policy, analysts said. Read more
As Alan Beattie wrote recently, a clear divergence in monetary policy is polarising the emerging market (EM) universe. Some countries, such as China last Friday, have cut interest rates to invigorate demand while others, such as Russia and Brazil, have had to hike rates to battle inflation.
The divide is growing starker, forming a basic template for EM investors. Softer oil and commodity prices are subduing inflation in most countries, creating room for easier monetary conditions. Other countries, however, are still struggling with ideosyncratic frailties, preventing them from capitalising on the ebbing EM prices. Read more
South Africa’s new central bank governor took centre stage on Thursday, but the story was a familiar tale of caution and bleak growth for Africa’s most developed nation.
After heading his first monetary policy committee meeting, Lesetja Kganyago said the decision was taken to keep the bank’s repo rate on hold at 5.75 per cent.
Kganyago took up his post earlier this month, replacing Gill Marcus, who announced in September that she would not be seeking a second five year term. But little changed in the language and detailed delivery of the last MPC statement of the year. Read more
Two central banks surprised the world last week with unexpected hikes in interest rates in the face of panicky financial markets. Raising rates a startling 150 basis points, the Central Bank of Russia was reacting sharply to yet another week of runs on the rouble. (It fell further this week nonetheless.)
The other, the Central Bank of Brazil, increased the cost of borrowing by a more modest 25 basis points. It seemed to be attempting to re-establish its independence credentials after the previous weekend’s presidential elections and subsequent worries that economic policy would tend towards the populist and the inflationary.
Yet just as with the advanced economies’ central banks – the Bank of Japan ramping up quantitative easing just as the Fed withdraws – monetary policy has diverged rather than unified in the big emerging economies. Read more
Romania’s latest interest rate cut – to another all-time low – comes after a sharp slowdown in growth, but further easing will have to be weighed against the political outlook and the government’s likely parting of ways with the IMF.
The National Bank of Romania (BNR) cut its key rate 25 bps to 3 per cent on September 30, while reducing its minimum reserve requirements two percentage points to 10 per cent. The latter is expected to increase market liquidity by around 3.6bn leu ($1bn) from October 24, according to a note from BCR, Romania’s largest commercial bank. Read more
As beyondbrics noted early this month, the recent “dollar surge” and rising US interest rates are already having an impact on EM currencies. Two weeks later and the effects are becoming more pronounced, as the charts below show.
First, US interest rates. This is the yield on 10-year US Treasury bonds this year.
Source: S&P Capital IQ
Serbia’s central bank cut its key policy rate by 50 basis points on June 13, twice the reduction expected and another bold monetary easing move. The National Bank of Serbia (NBS) has now lowered rates by a full 100 bp in two months. The NBS is taking advantage of low inflation and easing pressure on prices, and taking account of the recent radical policy action by the European Central Bank (ECB). But the cut should also be seen in the context of May’s devastating floods, which caused Serbia’s fragile recovery to grind to a halt and has shaken domestic and international confidence in the newly-elected government. Read more
It goes on, and on… and on. Hungary’s central bank trimmed its base rate once again on Tuesday – this time by a third consecutive reduction of 10 basis points – to leave the key rate at 2.4 per cent.
The latest move, largely priced in by the markets, means the bank has cut the rate by 460 basis points since its cycle of easing began in August 2012. Read more
After months of speculation and the world’s longest tightening cycle, it looks like Brazil may finally be done increasing interest rates.
Late on Wednesday, the bank raised Brazil’s Selic rate another 25 basis points to 11 per cent – the highest level in more than two years. Read more
Brazil’s central bank holds its regular monetary policy meeting Wednesday and the market consensus has rarely been more uniform. Most analysts are forecasting a 25 basis point increase to 11 per cent in the benchmark Selic rate. Read more
South Africa kept interest rates unchanged on Thursday as Africa’s largest economy continues to grapple with the policy challenge of subdued growth set against inflationary pressures.
The decision by the central bank’s monetary policy committee to keep its repo rate at 5.5 per cent was expected as the volatile rand has recovered slightly from a disastrous beginning to the year when it tumbled to five year lows against the US dollar. Still, the MPC’s decision was a tight one, with a four-to-three split on the committee. Read more
Has the Great Magyar Rate-Cutting Cycle come to an end? To many, it looks that way, following the central bank’s decision on Tuesday to snip just 10 basis points off the base rate, to leave it at 2.6 per cent a year.
And even this trim, the smallest made so far in a 20 month long trimming spree, is possibly more symbolic, an effort to keep up the momentum in front of elections, scheduled on April 6, just 12 days hence. Read more
By Michael Power of Investec Asset Management
The Brics acronym has captured investors’ imagination like few others. But has it really helped us understand the intrinsic nature of the risks and rewards in the emerging market (EM) asset class, thereby allowing us to profit from investing in it? I have long had my doubts and recent turmoil in the asset class has only confirmed them. So is there a better way of understanding this asset class? My conclusion is that we should move away from the prism of Brics – and indeed some of the other acronyms now flavouring this alphabet soup – and instead think of EMs in terms of blocs.
There is a pressing need to do this: the paradox of investing in EMs is that whilst the structural case for doing so is overwhelming, it remains an asset class that is still both cyclically risky and very volatile. This suggests the right question to ask is no longer “whether” to invest in EMs, but “how”. And in answering this “how”, we must above all acknowledge that not all EMs were born alike. Read more
Predicting what the Hungarian central bank is going to do is becoming something of a fools game. Last month, the bank cut rates for the 18th time in a row. So far, so predictable – except the bank changed from 20 basis point cuts (as it had used five times previously) to 15bp.
On Tuesday, the bank cut again – a 19th consecutive cut – but confounded most analysts who had predicted that the weakened currency would give the MPC reason to reduce by a smaller margin. No chance – the bank stuck to its new 15bp reduction, dropping rates from 2.85 per cent to 2.7 per cent. Where will it end? Read more
It’s been a difficult week for the Turkish lira, which hit multiple record lows against the US dollar. It closed on Friday down 1.39 per cent on the day at 2.3242 to the dollar. Turkey’s central bank mounted a spirited defence of the currency on Thursday but only succeeded burning through around $3bn of its $40bn reserves.
The bank does, however, have other tools. On Tuesday, it said that despite keeping its three main interest rates unchanged it would, through what it refers to as additional monetary tightening, occasionally raise the overnight rate from 7.75 per cent to 9 per cent. But what exactly is additional monetary tightening and how does it work? Read more
New year, new cut: Hungary’s central bank trimmed its base rate by 15 basis points to 2.85 per cent on Tuesday, a move that surprised analysts only by its size – being the first of its kind after the monetary council turned to 20 basis point cuts in the second half of last year. It brings Hungary’s policy rate to yet another all-time low, down from 7 per cent when the bank starting cutting in August 2012, as inflation stays under control and growth remains a concern. Read more
So, Turkey’s central bank has passed up a chance to affirm its independence and, apparently, bowed to political pressure by keeping its policy interest rates unchanged.
Or has it? In a statement on its website, the bank said that while its three main interest rates would remain unchanged, one of them, the overnight lending rate, would be raised from the current 7.75 per cent to 9 per cent on “exceptional tightening days”. Read more
The Turkish lira hit the latest in a series of all-time lows against the dollar on Monday when it fell to TL2.2502, on a day when the country’s new economy minister said a further slide would not be a problem and called on the central bank not to increase interest rates.
An interest rate rise might in normal circumstances be expected at the bank’s monetary policy committee meeting on Tuesday.
But this is Turkey. Read more
Hungary’s central bank made it 17 out of 17 on Tuesday when it trimmed its policy interest rate by 20 basis points to 3 per cent, completing a 4 percentage point reduction since the bank began cutting in August 2012.
There may still be more cuts to come. Read more