"Whatever It Takes" – Whatever That Means

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

China continues the “counter the global monetary tightening” trend – stand ready for “blanket” rate cuts?

China to Step Up ‘Blanket’ Easing

“Whatever it Takes” – The catchphrase made famous by Mario Draghi, the former President of the European Central Bank, has a whole new meaning these days. And this includes the monetary policy’s direction. While most central banks are hiking or preparing for lift-off, China is doing exactly the opposite due to mounting concerns about the near-term growth outlook. Up until now, China had been very “economical” with the new stimulus, relying mostly on targeted measures to prop up individual sectors/types of companies. But the latest comments from the State Council signal that “blanket” rate cuts might be imminent. The statement specifically mentioned the reserve requirements for banks, but the consensus also sees a 10bps cut in the medium-term lending facility rate later today.

EM Hawks Continue to Circle

Meanwhile in the hawkish camp, Korea delivered a 25bps rate hike yesterday – hardly surprising given that inflation is well above the target and 2.6 standard deviations higher than the multi-year average (see chart below). Argentina also tightened yesterday – by 250bps. However, while Argentine inflation is at a 20-year high, the policy rate is clearly not (=more hikes, please). The latest upside inflation surprises also questioned the most recent policy rate moves in Peru, Chile and Colombia – the so-called “dovish” hikes. The Governor of the Peruvian central bank warned yesterday that “inflation might become permanent”, giving rise to suggestions that rate hike frontloading in the region will be even more aggressive.

Turkey in Policy Limbo

Meanwhile in Turkey, it is still more about “what does it mean?” than “whatever it takes”. The central bank is “frozen” – the policy rate was kept on hold this morning despite headline inflation soaring to 61.14% year-on-year in March. There were no major changes in the statement, and there is still zero clarity on policy guidance. What the central bank is trying to achieve with these policies? We have no idea. But it is worth noting that Turkey is among the countries most affected by Russia’s invasion of Ukraine (tourism and energy imports), and this makes local assets (and especially the currency) vulnerable in the absence of a solid policy framework. Stay tuned!

Chart at a Glance: EM Inflation – Well Above Multi-Year Trends

Chart at a Glance: EM Inflation – Well Above Multi-Year Trends

Source: VanEck Research; Bloomberg LP

Originally published by VanEck on April 14, 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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