Band Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
Brazil has earned its right to exit its aggressive tightening cycle. Can other emerging markets be as successful in adjusting monetary policy?
End of EM rate hike cycles
Consider the following scenario – the end of the tightening cycle in 2022 and potential rate cuts in 2023. No, we are not talking about market expectations for the US Federal Reserve. It is a very likely new monetary policy trajectory in Brazil, after what could have been the last 50 basis point rate hike yesterday (see chart below). Brazil was advancing aggressively from the start of 2021, but all good (monetary policy) things eventually come to an end. A dovish tweak in yesterday statement – assessing rather than forecasting the need for a residual key rate adjustment – suggests that the central bank could already take a break at the next meeting. The end result of the central bank’s preemptive policy response and the spike in inflation is that Brazil’s Real Yields adjusted by expected inflation are among the highest in emerging markets (EM) (up to 10 years) against economic fundamentals.
Emerging markets lagging behind
Brazil’s dovish pivot was entirely justified – something that cannot be said of the Czech National Bankwho surprised the market by remaining on hold today. Admittedly, the expected rate hike was small (only 25 basis points), much of the inflation is due to external factors and there are legitimate concerns about a growth “cliff” in the second half. Still, taking a break when annual inflation is above 17% makes sense appearance of a policy error.
Emerging Market Takeoffs and the Broader Policy Agenda
Not all emerging market policy pivots are accommodative. Asian emerging market central banks launch hawkish offensive – we are keeping an eye on India this week and Thailand on August 10 (the market anticipates a takeoff of 25 basis points, which is long overdue). Some emerging market rate hikes look dramatic at first glance, but the overall policy framework is so weak rate hikes by themselves would not make much difference. We are of course talking about Argentina, where the central bank recently hiked 800 basis points, but yesterday’s stabilization plan looked less impressive. The proposals had a brilliant “packaging” – four pillars and such. But there were no changes in the monetary regime and only cosmetic fiscal measures. If these problems are not resolved, the current crisis will worsen further. Stay tuned!
Chart at a Glance: Brazil Tightening Cycle – Ready to Exit
Source: Bloomberg LP
Originally published by VanEck on August 4, 2022.
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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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