Emerging Policy-More interest rate cuts

December 17, 2012

A big week for central bank meetings looms and the doves are likely to be in full flight.

Take the Reserve Bank of India, the arch-hawk of emerging markets. It meets on Tuesday and some, such as Goldman Sachs, are predicting a rate cut as a nod to the government’s reform efforts. That call is a rare one, yet it may have gained some traction after data last week showed inflation at a 10-month low, while growth languishes at the lowest in a decade. Goldman’s Tushar Poddar tells clients:

With both growth and inflation surprising on the downside relative to the RBI’s forecast, there is a reason for the central bank to move earlier than its previous guidance.

Most other analysts however reckon the RBI will judge it too soon to cut rates. It could opt instead for a cut in banks’ cash reserve ratio in order to prod them into loosening lending rates. A Reuters poll of analysts predicts a half point rate cut in the Jan-March 2013 period.

Over to Turkey where the central bank has been making dovish noises and actions (it has trimmed its overnight lending rate three times this year) . On Tuesday, it is expected to cut its main policy rate for the first time in over a year, thanks to falling inflation and last week’s data that showed the Turkish economy grew just 1.6 percent in the third quarter, compared to forecasts of 2.6 percent.

Of the 13 analysts polled by Reuters, 12 expect a cut in the one-week policy rate, while 11 predict a cut in the overnight borrowing rate. Governor Erdem Basci has said as much already, telling a conference that “a measured reduction in the policy rate and the overnight borrowing rate” was adequate at this stage.

Expect interest rates to be cut in central Europe as well. Poland, Hungary and the Czech Republic have already eased policy but recent growth and price data — weaker than expected — have delivered a punch to policymakers and are seen galvanising them into even bolder moves.

Hungary is expected to cut rates on Tuesday to 5.75 percent, a two-year low. That would be the fifth cut in a row for the recession-mired country. The impetus for policy easing has been strengthened also by the dominance of government-appointed rate setters on the central bank’s board.  The Czech central bank, which meets on Wednesday, has little room to cut rates further having slashed them already to 0.05 percent. But markets are on the watch for further signals on currency intervention — policymakers have intervened verbally 10 times since the last rate cut.

Finally Colombia on Friday. That’s a closer call. It surprised with a rate cut in November, citing the weak global economy, but given that decision was not unanimous, a follow-up this month looks unlikely. With an economy growing at 4.5 percent and inflation o under 3 percent, Colombia does not look desperately in need of rate cuts. But lower rates would ease the steady upward pressure on the peso which has forced the central bank to intervene almost every day in the spot currency market.

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