Rate cuts are still coming thick and fast in emerging markets — in some cases because of falling inflation and in others to deter the gush of speculative international capital.
Arguably the biggest event in emerging markets is tomorrow’s Reserve Bank of India (RBI) meeting which is expected to yield an interest rate cut for the first time in nine months.
India’s inflation, while still sticky, eased last month to a three-year low of around 7 percent. And a quarter point rate cut to 7.75 percent will in effect be a nod from the RBI to the government’s recent reform efforts. In anticipation of a rate cut, Indian 10-year bond yields have dropped 50 basis points since the start of the year. But the RBI, probably the world’s most hawkish central bank at present, has warned that markets need not expect a 50 bps cut or even a sustained rate-cutting campaign. Governor Duvvuri Subbarao said last week inflation still remains too high for comfort, while on Monday the RBI said in a quarterly report that more reform was needed to make the central bank turn its focus on growth.
In Colombia, the BanRep is likely to cut rates later today for the fifth time in seven months. Growth slowed to 2.1 percent in the third quarter, considerably below forecasts, while inflation in December was 2.4 percent, well below the midpoint of the target range. Then there is the matter of the peso which has risen to the 1750 per dollar level that has triggered intervention in the past. Many analysts therefore reckon currency strength will be the main driver for the central bank’s decision later today. From that angle too, a cut looks logical.
According to Bank of America/Merrill Lynch:
We expect Banrep to compromise by cutting, and maintaining FX intervention unaltered, presenting the cut as a policy that tackles both deceleration and appreciation….another cut at Monday’s meeting would seem to be a safe bet.