Emerging policy-One cut, two steady

January 21, 2013

What a varied bunch emerging markets have become. At last week’s monetary policy meetings, we saw one rate rise (Serbia) and differing messages from the rest. Mexico turned dovish while hitherto dovish Brazilian central bank finally mentioned the inflation problem. Russia meanwhile kept markets guessing, signalling it could either raise rates next month or cut them.

This week, a cut looks likely in Turkey while South Africa and the Philippines will almost certainly keep interest rates steady.

Turkey’s main policy rate – the one-week repo rate – and overnight lending rate are widely expected to stay on hold at 5.50 percent and 9 percent respectively on Tuesday. But some predict a cut in the overnight borrowing rate – the lower end of the interest rate corridor, motivated partly by the need to keep the currency in check.   The lira is trading near 10-month highs, thanks to buoyant inflows to Turkish capital markets.  That has helped lower inflation from last year’s double-digit levels.

Goldman Sachs in fact, reckon the central bank will cut both the borrowing and lending rates by 25bps and also raise the Reserve Option Coefficient (the amount of foreign currency that lenders have to provide for the gold portion of their central bank reserves). They write:

We believe that the Bank has shifted focus towards the financial stability risks posed by accelerating capital inflows, and away from domestic inflation. We believe a combination of ROC hikes and (more visibly) cuts to the borrowing and lending rates, bringing the interest rate corridor down, will be used to lean against these inflows and their subsequent FX appreciation pressures.

Analysts at BNP Paribas agree:

While the current level of the lira is unlikely to be strong enough to elicit an aggressive reaction from the central bank, we still think that a measured 25 basis points cut to the lower end of the interest rate corridor is likely at next week’s central bank’s policy meeting, as a precaution against ongoing capital inflows.

In South Africa on the other hand, it is the currency’s weakness that is likely to force the central bank (SARB) to hold its hand.

This is a market that could really do with an interest rate cut — persistent labour unrest means GDP growth is likely to undershoot forecasts for 2.9-3.0 percent this year. But all 23 economists polled by Reuters see the SARB keeping rates  at 5 percent this  Thursday. Data this week expected to show annual price growth close to the central bank’s 6 percent upper limit and that’s partly down to the currency which lost almost a fifth of its value against the dollar last year. In 2013 the rand  is already down 5 percent and the central bank cannot risk weakening it further. Goldman Sachs again:

If anything, announcements of mine closures, a third sovereign rating downgrade, ongoing rand volatility, and the potential for further widening of the CA deficit are likely to have pushed the hurdle for a rate cut higher than in 2012 second half.

Philippines in comparison looks lucky. Inflation is close to the lower end of the central bank’s target band while GDP growth is running around 6 percent. The peso appreciated 6 percent last year against the dollar.  No wonder Governor Armando Tetangco is relaxed. He said last week that balanced inflation risks and robust GDP growth suggested the “current policy settings are appropriate.”  Expect rates to be left at a record low 3.5 percent on Thursday.

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