EM Rates - Not All “On Holds” Are Equal

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

Several EM central banks stayed on hold today, but there is a lot of underlying action in that group, including a hawkish shift in Indonesia and Turkey’s attempts to handle the widening gap between the policy rate and inflation.

Emerging Markets Rates

Today is a “smorgasbord” day in emerging markets (EM) rates, with a wide range of monetary policy outcomes across regions. China continued its cautious easing cycle – the central bank lowered the 1-year Loan Prime Rate by 10bps and the 5-year rate by 5bps (less than expected). The move comes on the heels of a 10bps cut in the Medium-Term Lending Facility, but it is too small to have a material impact – especially in the property sector. We should be expecting more policy support (including regulatory – see headlines about developers’ access to escrow funds) to stabilize the sector and ease headwinds for this year’s GDP growth. Elsewhere in EM, Ukraine and Sri Lanka hiked by respective 100bps and 50bps. Ukraine’s move was more hawkish than expected, but this is not really surprising given the impact of the escalating conflict with Russia on Ukrainian assets, including the currency.

Central Bank Policy

Now, let’s move to central banks that stayed on hold. There is a saying that “still waters run deep”, and indeed there were plenty of policy undercurrents in that group. We had a “dovish” hold in Malaysia – the pro-growth bias remained intact, and the central bank’s policy stance was described as “appropriate” and “accommodative”. Indonesia’s “hold” was decisively hawkish – the central bank started to normalize its policy by raising the reserve requirements for banks (starting in March). The reference to tighter global financial conditions shows that the central bank is preparing for the U.S. Federal Reserve’s expected lift-off in March, and that the robust 2022 growth outlook puts it in a good position to do so.

Turkey Inflation Concerns

And then there is Turkey. It’s not that easy to describe that happened today – “weird”, “mysterious”, “cryptic”? I guess we should be grateful that there were no additional rate cuts – and the lira indeed staged a small rally – but at 14% the policy rate is outright inadequate against the backdrop of current (36.08%) and expected inflation (25.37%). The central bank provided no guidance, except for references to “unhealthy price formations” and promises to prioritize the currency during the “comprehensive” (whatever it means) revision of the policy framework. So, no news, no credibility, but no market panic either. Stay tuned!

Charts at a Glance: Turkey Policy Rate and Inflation – Playing with Fire?


Source: 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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