EM interest rates in 2013 – rise or fall

December 3, 2012

This year has been all about interest rate cuts. As Western central banks took their policy-easing efforts to ever new levels, emerging markets had little recourse but to cut rates as well. Interest rates in many countries from Brazil to the Czech Republic are at record lows.

Some countries such as Poland and Hungary are expected to continue lowering rates. Rate cuts may also come in India if a reluctant central bank finds its hand forced by the slumping economy. But in many markets, interest rate swaps are now pricing rate rises in 2013.

Are they correct in doing so? Emerging central banks will raise interest rates by an average 8 basis points next year, JP Morgan analysts predict.  UBS, in a recent note, reckons more EM central banks will raise rates than cut them. Analysts there offer the following graphic detailing their expectations:





Rates swaps are indeed pricing a half-point rise in Mexico over the coming year and 75 bps by end-August 2013.   They are also pricing small rate rises in South Korea and Chile.

Some of these signals may be false, especially if growth fails to pick up as expected. Benoit Anne, head of emerging markets strategy at Societe Generale, notes Mexico as an example where hawkish talk has lulled swaps markets into pricing in rate rises:

We believe that the central bank is simply trying to manage inflation expectations but that a policy rate hike is not on the cards over the next few months. Against this backdrop, the local curve pricing is well off in our view, pointing to some 50bp of hikes over the next nine months. On the macro front, while the economy has performed strongly in recent months, the latest string of data nonetheless seem to point to some recent softness, which is another argument against the chances of a future rate hike.

He is similarly dismissive of the market’s call for big rate hikes in Brazil, betting instead the Banco Central will stick with “lower for longer”. Friday’s shockingly bad economic growth data appears to make this likely.  Interest rate futures tumbled after the data. According to Anne:

Expect the (interest rate futures) curve to not only price out hikes in 2013 but even to shift to pricing some rate cuts.







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