By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
A smaller than expected rate hike in Hungary raised additional questions about policy frontloading in EM, despite very hawkish remarks from Brazil and the Czech Republic.
Central banks in EMEA and LATAM are still hiking (with notable exceptions like Turkey), but some appear to be having second thoughts about very aggressive rate hikes. Take Poland or Hungary, for example. Poland slowed the pace of tightening in November to 50bps. The Hungarian central bank raised the policy rate once again this morning, but the size of the hike was smaller than expected (30bps). The local bond market watches Hungary’s monetary policy trajectory very closely due to (1) the central bank’s plan to end its bond purchase program “shortly” and (2) the impact of pre-election spending on the budget deficit, which might partially offset rate hikes.
For what it’s worth, Hungary’s (and Poland’s) stance is in line with how the consensus sees policy rates in emerging markets (EM) in the next 12 months (see chart below). Rate hike frontloading is expected to peak this quarter, with policy tightening continuing in 2022 at a slower pace due to moderating inflation pressures and growth. The recent communications from certain central banks, however, question this timeline. Brazil’s minutes sounded very hawkish, and Governor Campos Neto talked about “a feeling of fiscal disorder” and “detaching” inflation in his remarks. The Governor of the Czech National Bank said that the policy rate should be closer to 4% than to 3% – which can add an extra hike to the consensus view.
As regards waning convictions, no other institution attracts more attention in EM than the Turkish central bank – albeit in the opposite direction. The question is whether authorities are getting closer to the pain threshold that would lead to a hawkish policy reversal. Yesterday, the central bank chose to intervene against “unhealthy price formations”, pushing the lira below 14/U.S. dollar. But the currency is having another nervous breakdown this morning – trading 410bps weaker against U.S. dollar (at 10:03am ET, according to Bloomberg LP) as the central bank is trying to figure out what to do next. Meanwhile, the consensus still expects a 100bps cut on Thursday. Stay tuned!
Chart at a Glance: EM Rate Hikes Expected to Peak in Q4
Source: VanEck Research; Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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