An action-packed week for emerging monetary policy.
First we had Poland stunning markets with a half-point rate cut when only 25 bps was priced. Governor Marek Belka said the double-cut marked a “full stop” after several cuts. Then came Brazil which kept rates on hold at 7.25 but turned hawkish after spending over 18 months in dovish mode. (Rates stayed on hold in Indonesia and Malaysia).
In Brazil, it was high time. Inflation and inflation expectations have been rising for a while, the yield curve has been steepening and anxiety has grown, not only about the central bank”s commitment to controlling inflation but also about its independence. Whether the central bank will actually start a hiking cycle anytime soon is another matter. Barclays reckon it will, predicting three consecutive 50 bps rate hikes starting from April. But analysts at Societe Generale are among those who are betting on flat rates for now. They point out that since the meeting, the Brazilian yield curve has moved to its flattest in a year and the 2017 inflation breakevens (the difference between the yields on fixed-rate and inflation-linked bonds of similar maturity) have fallen more than 50bps:
This implies that simply by showing a small amount of vigilance, a great deal of structural inflation concerns seem to have dissipated.
Second, the real has appreciated almost 5 percent this year on rate hike expectations and inflation. A rate rise at a time when most other central banks are lowering rates, will draw more inflows to the real, something the government is unlikely to be happy about.
Mexico’s policy meeting later on Friday could be very interesting. The Banxico has kept interest rates on hold at 4.50 percent for four years but could finally opt for a cut. Five of the 21 analysts polled by Reuters predict a 50 bps cut to a record low 4 percent.