EM Rates – No Deviations From Status Quo | Beyond Basic Beta Channel

By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy

Brazil maintained the same pace of rate hikes (75bps) and guidance. Turkey remained on hold with a seemingly hawkish statement – but is it just lip service?

“More of the same” – The Brazilian central bank continued to frontload rate hikes, maintaining the same pace (75bps), same guidance (75bps), and the same reasoning (“partial normalization”). A less uncertain fiscal backdrop eased pressure on the central bank to act more aggressively in the near term. However, the real policy rate remains deeply negative (see chart below) – not the best setup against the backdrop of rising inflation.  The emerging narrative is that Brazil is on the road to redemption policy-wise – the central bank’s measured tightening would fit right in.

“Lip service?” – Turkey kept the policy rate on hold at 19%, with seemingly cautious verbiage (along the lines of keeping policies tight until we get inflation much lower). The central bank’s next move is almost 100% certain to be a rate cut – the question is when and how much. Most commentators agree that there is no room for a cut until much later this year (from the fundamental point of view). The governor, however, believes that inflation is going to peak in April – hence concerns that he might go for a symbolic (50bps) cut at the next meeting.

“Virus concerns” – The COVID’s resurgence – and especially its impact on growth – dominated rate-setting meetings in the Czech Republic, Malaysia, and Thailand. All three central banks stayed on hold in April, but the Czechs appear to be the most ready to hike once the pandemic situation becomes clearer. One factor that might affect the Czech timeline is the currency’s appreciation. The market clearly noticed the country’s inflation pressures and a very solid growth rebound – and the central bank knows from the past experience that a stronger currency can act as a stand-in for rate hikes.

Charts at a Glance: Brazil – Real Policy Rate Is Still Deeply Negative

Charts at a Glance: Brazil – Real Policy Rate Is Still Deeply Negative

Source: VanEck Research, Bloomberg LP

Originally published by VanEck, 5/6/21


PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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