Global Investing

Emerging Policy-The inflation problem has not gone away

This week’s interest rate meetings in the developing world are highlighting that despite slower economic growth, inflation remains a problem for many countries. In some cases it could constrain  policymakers from cutting interest rates, or least from cutting as much as they would like.

Take Turkey. Its central bank surprised some on Tuesday by only cutting the upper end of its overnight interest rate corridor: many had interpreted recent comments by Governor Erdem Basci as a sign the lower end, the overnight borrowing rate, would also be cut. That’s because the central bank is increasingly concerned about the lira, which has appreciated more than 7 percent this year in real terms. But the bank contented itself by warning markets that more cuts could be made to different policy rates if needed (read: if the lira rises much more).

But inflation, while easing, remains problematic.  On the same day as the policy meeting, the International Monetary Fund recommended Turkey raise interest rates to deal with inflation, which was an annualised 9.2 percent in September. The central bank’s prediction is for a year-end 7 percent rate but that is 2 percentage points higher than its 5 percent target. So the central bank probably was sensible in exercising restraint.

There are other, Turkey-specific risks too. Tim Ash at Standard Bank says:

The message is that it is still a little early to put the foot to the floor on the gas again, when the current account deficit remains large, and financing risks are still considerable.

The other big meeting this week is in South Africa where the central bank, SARB, is likely to leave its interest rates unchanged at 5 percent on Thursday, despite dismal economic growth numbers. Data today showed headline price growth was a higher-than-expected 5.6 percent in October, close to the upper end of the SARB’s 3-6 percent target band. With inflation sticky, the central bank simply cannot risk weakening the rand any further with a rate cut. The currency has already fallen 10 percent against the dollar this year. From Danske Bank:

Emerging Policy-Data vindicates doves but not all are cutting

Rate decisions last week in emerging markets well anticipated this week’s crop of economic data.

Russia for instance not only kept rates on hold last Friday (after raising them at its previous meeting) but struck a less hawkish tone than expected. Voila, data this week showed growth in the third quarter was 2.9 percent compared to 4 percent in April-June.

We’ll have to wait for November 30 to see what Poland’s Q3 growth numbers look like but data today shows inflation eased to two-year lows in October. That appears to vindicate the central bank’s decision to cut interest rates last week. for the first time in three years.  Simon Quijano-Evans at ING Bank writes:

Emerging Policy-Hawkish Poland to join the doves

All eyes on Poland’s central bank this week to see if it will finally join the monetary easing trend underway in emerging markets. Chances are it will, with analysts polled by  Reuters unanimous in predicting a 25 basis point rate cut when the central bank meets on Wednesday. Data has been weak of late and signs are Poland will struggle even to achieve 2 percent GDP growth in 2013.

How far Polish rates will fall during this cycle is another matter altogether. Markets are betting on 100 basis points over the next 6 months but central bank board members will probably be cautious. Inflation is one reason  along with the  the danger of excessive zloty weakness that could hit holders of foreign currency mortgages. One source close the bank tells Reuters that 75 or even 50 bps would be appropriate, while another said:

“The council is very cautious and current market expectations for rate cuts are premature and excessive.”

Pricing ‘new brooms’ at White House and Fed

With less than two weeks left to the U.S. presidential elections and all three televised debates done and dusted, investors are at last squaring up to the detailed financial market impact of the event itself and the column inches in newsprint and research reports lengthen by the day.

Barclays interest rate strategists are one of the first to stick hard numbers on likely market outcomes in a report late Tuesday that dug deep into both the well-documented “fiscal cliff” but also into the less discussed uncertainty surrounding the medium-term direction of the Federal Reserve and its leadership.

With news reports suggesting Fed chief Ben Bernanke will not now choose to stand again for a third term at the helm of the U.S. central bank in 2014, some may argue Fed risk from the election has been neutered. But with monetary policy still the only game in town policy-wise for many asset managers – at least on the stimulus side — then even the slightest risk to the Fed’s mandate remains a significant market factor.

Emerging Policy-the big easing continues

The big easing continues. A major surprise today from the Bank of Thailand, which cut interest rates by 25 basis points to 2.75 percent.  After repeated indications  from Governor Prasarn Trairatvorakul that policy would stay unchanged for now, few had expected the bank to deliver its first rate cut since January.  But given the decision was not unanimous, it appears that Prasarn was overruled.  As in South Korea last week,  the need to boost domestic demand dictated the BoT’s decision. The Thai central bank  noted:

The majority of MPC members deemed that monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential negative impact from the global economy which remained weak and fragile.

Thailand expects GDP to grow 5.7 percent this year and Prasarn has cited robust credit demand as the reason to keep rates on hold. But there have been ominous signs of late — exports and factory output have now fallen for three months straight, which probably dictated today’s rate cut.  Remember that exports, mainly of industrial goods, account for 60 percent of Thai GDP and the outlook is perilous — the BOT has already halved its export growth forecast for 2012 to 7 percent and has said it will cut this estimate further.

Emerging Policy: Rate cuts proliferate

Emerging market central banks have clearly taken to heart the recent IMF warning that there is “an alarmingly high risk”  of a deeper global growth slump.

Two central banks have cut interest rates in the past 24 hours: Brazil  extended its year-long policy easing campaign with a quarter point cut to bring interest rates to a record low 7.25 percent and the Bank of Korea (BoK) also delivered a 25 basis point cut to 2.75 percent.  All eyes now are on Singapore which is expected to ease monetary policy on Friday while Turkey could do so next week and a Polish rate cut is looking a foregone conclusion for November.

South Africa, Hungary, Colombia, China and Turkey have eased policy in recent months while India has cut bank reserve ratios to spur lending.

Is the rouble overhyped?

For many months now the Russian rouble has been everyone’s favourite currency. Thanks to all the interest it rose 4 percent against the dollar during the July-September quarter. How long can the love affair last?

It is easy to see why the rouble is in favour. The central bank last month raised interest rates to tame inflation and might do so again on Friday. The  implied yield on 12-month rouble/dollar forwards  is at 6 percent — among the highest in emerging markets.  It has also been boosted by cash flowing into Russian local bond market, which is due to be liberalised in coming months. Above all, there is the oil price which usually gets a strong boost from Fed QE.  So despite worries about world growth, Brent crude prices are above $110 a barrel. Analysts at Barclays are among those who like the rouble, predicting it to hit 30.5 per dollar by end-2012, up from current levels of 31.12.

All that sounds pretty bullish. But there are reasons why the rouble’s days of strength may be numbered. First the QE effect is unlikely to last. As we argued here, QE’s impact will be less strong than after the previous two rounds. Analysts at ING Bank point out that in 3-6 months after the launch of QE2 oil prices gained 40 percent, pushing the rouble up nearly 10%. This time oil won’t repeat the trend this time, and neither will the rouble, they say:

This week in EM, expect more doves

With the U.S. Fed having cranked up its printing presses, there seems little to stop emerging central banks from extending their own rate cut campaigns this week.

The most interesting meeting promises to be in the Czech Republic. We saw some extraordinary verbal intervention last week from Governor Miroslav Singer, implying not only a rate cut but also recourse to “unconventional” monetary loosening tools. Of the 21 analysts polled by Reuters, 18 are expecting a rate cut on Thursday to a record low 0.25 percent.  Indeed, in a world of currency wars, a rate cut could be just what the recession-mired Czech economy needs. But Singer’s deputy, Moimir Hampl,  has muddled the waters by refuting the need for any unusual policies or even rate cuts.  Expect a heated debate (forward markets are siding with Singer and pricing a rate cut).

Hungary is a closer call, with 16 out of 21 analysts in a Reuters poll predicting an on-hold decision. The central bank board (MPC) is split too. Analysts at investment bank SEB point out that last month’s somewhat surprising rate cut was down to the four central bank board members appointed by the government. These four outvoted Governor Andras Simor and his two deputies who had favoured holding rates steady, given rising inflation. (Inflation is running at 6 percent, double the target).  That could happen again, given the government just last week reiterated the need for “lower interest rates and ample credit.  So SEB analysts write:

Russia: a hawk among central bank doves?

This week has the potential to bring an interesting twist to emerging markets monetary policy. Peru, South Korea and Indonesia are likely to leave interest rates unchanged on Thursday but there is a chance of a rate rise in Russia. A rise would stand out at a time when  central banks across the world are easing monetary policy as fast as possible.

First the others. Rate rises in Indonesia and Peru can be ruled out. Peru grew at a solid  5.4 percent pace in the previous quarter and inflation is within target. Indonesian data too shows buoyant growth, with the economy expanding 6.4 percent from a year earlier. And the central bank is likely to be mindful of the rupiah’s weakness this year — it has been one of the worst performing emerging currencies of 2012.

Korea is a tougher call. The Bank of Korea stunned markets with a rate cut last month, its first in three years. Since then, data has shown that the economy is slowing even further after first quarter growth eased to 2008-2009 lows. Exports are falling at the fastest pace in three years. But most analysts expect it to wait it out in August and then cut rates in September. Markets on the other hand are bracing for a rate cut as yields on 3-year Korean bonds have fallen well under the central bank’s main 7-day policy rate.

India, a hawk among central bank doves

So India has not joined emerging central banks’ rate-cutting spree .  After recent rate cuts in Brazil, South Korea, South Africa, Philippines and Colombia, and others signalling their worries over the state of economic growth,  hawks are in short supply among the world’s increasingly dovish central banks. But the Reserve Bank of India is one.

With GDP growth slowing to  10-year lows, the RBI would dearly love to follow other central banks in cutting rates.  But its pointed warning on inflation on the eve of today’s policy meeting practically sealed the meeting’s outcome. Interest rates have duly been kept on hold, though in a nod to the tough conditions, the RBI did ease banks’ statutory liquidity ratio. The move will free up some more cash for lending.

What is more significant is that the RBI has revised up its inflation forecast for the coming year by half a  percentage point, and in a post-meeting statement said rate cuts at this stage would do little to boost flagging growth. That, to many analysts, is a signal the bank will provide little monetary accommodation in coming months. and may force  markets to pedal back on their expectation of 100 basis points of rate cuts in the next 12 months.  Anubhuti Sahay at Standard Chartered in Mumbai says: