EM Rates – All Quiet on the Policy Front?

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation

Summary

Some central banks in EM stayed on hold today. But make no mistake – the underlying policy currents are very different.

Emerging Market Policy Divergence

Three major emerging market (EM) central banks chose to keep rates unchanged today – but the underlying policy “currents” are very different. It is hard to imagine that Hungary will not respond with more tightening after a sizable upside inflation surprise, which pushed January’s headline inflation more than 3 standard deviations higher than the multi-year trend. One caveat here is the speed of rate hikes. Hungary had already raised its base rate by 230bps and the 1-week deposit rate by 355bps since June 2021. So, it can afford to proceed more slowly going forward. The next rate-setting meeting will take place on February 22, and there is a good change that we’ll see another measured 30bps move in the base rate (today’s “on hold” referred to 1-week deposit rate).

Measured Policy Normalization in EM Asia

The central bank of the Philippines (BSP) reiterated its pro-growth stance, but – interestingly – raised inflation forecasts, leading to suggestions that a lift-off might be on the cards. The market is in the “normalization is overdue” camp, seeing a fair amount of rate hikes in the next six months (150bps). However, headline inflation is well within the target, and expected to stay within the target for the rest of the year (see chart below). So, monetary authorities in the Philippines – just like in some other Asian economies – can take their time, especially if the U.S. Federal Reserve goes for a 25bps instead of (the recently expected) 50bps rate hike in March.

Little Value in Turkey Local Debt

And then there is Turkey: (thankfully) on hold today, but in a world of its own as regards the policy agenda. The central bank (sorry, President Tayyip Erdogan) wants a cut, but easing against the backdrop of Argentine-looking inflation (around 50% year-on-year, with upside risks – see chart below) could easily send the currency and the bond market into another frenzy. And this explains resorting to verbal “gymnastics” like “encouraging permanent liraization”, while promised policy guidance is still nowhere to be seen. Turkey’s nominal yields look high (22.1% 5-year yield), but real rates are not even remotely attractive in all segments of the yield curve. We are always on a lookout for positive policy U-turns – can this happen in Turkey with the current political setup? Stay tuned!

Inflation Targets Still Elusive in EMEA and LATAM

Source: VanEck, Bloomberg LP

Originally published by VanEck on February 17, 2022.

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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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