Emerging policy-Down in Hungary; steady in Latin America
A mixed bag this week on emerging policy and one that shows the growing divergence between dovish central Europe and an increasingly hawkish (with some exceptions) Latin America.
Hungary cut rates this week by 25 basis points, a move that Morgan Stanley described as striking “while the iron is hot”, or cutting interest rates while investor appetite is still strong for emerging markets. The current backdrop is keeping the cash flowing even into riskier emerging markets of which Hungary is undeniably one. (On that theme, Budapest also on Wednesday announced plans for a Eurobond to take advantage of the strong appetite for high-risk assets, but that’s another story).
So despite 6 percent inflation, most analysts had predicted the rate cut to 6 percent. With the central bank board dominated by government appointees, the stage is now set for more easing as long as investors remain in a good mood. Rates have already fallen 100 basis points during the current cycle and interest rate swaps are pricing another 100 basis points in the first half of 2013. Morgan Stanley analysts write:
The bank’s modus operandi seems to be to take rates down as long as the risk environment allows them.
The bank’s dovish stance has pushed short-end Hungarian yields more than 150 basis points lower since June while the forint has shrugged off the cuts to gain more than 11 percent this year against the euro. But not everyone is buying. Benoit Anne, head of EM strategy at Societe Generale advises clients to buy euro whenever the forint rises:
What is moving the market is what the central bank does, not what the central bank should do.
Elsewhere, central banks are being more cautious. Israel left interest rates on hold at 2 percent on Monday after a surprise cut last month. While growth is at a three-year low and manufacturing and consumer confidence are both contracting, the bank appears content with a slower 3 percent growth rate this year as inflation is well within the central banks target. Thai policy rates were also left steady on Wednesday at 2.75 percent, with the central bank predicting a pick-up in the global economy next year.
Expect no changes this week in Latin America’s Big Two — Brazil and Mexico. What’s more, interest rate swaps are betting that the next move in these countries will be a rate hike, with a quarter point priced in both markets by next July.
Brazil’s meeting comes at a particularly exciting time for the real which tanked last week to 3-1/2-year lows against the dollar after comments from finance minister Guido Mantega. The central bank’s subsequent intervention to shore up the currency would appear to rule out a rate cut today from the current 7.25 percent record low. Analysts polled by Reuters reckon the central bank is done with easing for now after 10 rate cuts.
Mexico too will hold its 4.5 percent interest rate steady. While inflation remains above target, Banxico fears that any failure to resolve the fiscal cliff issue will hit Mexican exports to the United States hard. Again, interest rate swaps are pricing a hike as the central bank’s next move.
As with most things, there are exceptions and as Colombia showed last week. It cut rates unexpectedly last week to 4.5 percent, noting slumping export growth and industrial output. The cut was also possibly motivated by the peso’s 6.5 percent appreciation against the dollar this year, which elicited protests from exporters. That lobby is calling for even more cuts.