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.