By Natalia Gurushina Chief Economist, Emerging Markets Fixed Income
Most global central banks will have to continue tightening at a brisk pace to deal with inflation, but some – like Brazil – are closer to the finish line.
Global Rate Hikes
The global monetary policy “peloton” is firmly in hawkish mode, moving at a brisk pace in its uphill inflation battle. Yesterday’s 75bps rate hike in the U.S. – accompanied by Chairman Jerome Powell’s hawkish press conference – led to multiple upside revisions of the November rate call for the U.S. Federal Reserve (Fed), as well as a higher terminal rate projection (see chart below). The Bank of England hiked by 50bps (in a split vote with some support for +75bps) and the Philippines delivered the expected 50bps rate hike, as there is evidence that domestic demand pressures are getting stronger. Some “peloton” members, however, are having dovish thoughts – driven, in part, by currency considerations. Take Switzerland, for example. The central bank finally left the land of negative policy rates this morning with a 75bps rate hike, but it was less aggressive than expected by many observers, and the statement was not hawkish either.
The End of Tightening Cycles
Some global tightening race participants are getting closer to the finish line. Brazil kept the policy rate on hold yesterday, but a 13.75% policy rate still translates into the highest ex–ante real policy rate among major emerging markets (EMs), as well as into a double–digit rate differential with the Fed. Norway is widely considered a “policy normalization” trailblazer in developed markets (DM), and today’s central bank statement opened the door for a slower pace of hikes going forward. Latecomers to the global tightening party, however, now have to run faster just to keep up with the “peloton”. The Indonesian central bank went for a larger than expected +50bps rate hike today. Details of South Africa’s rate–setting meeting looked even more hawkish than a sizable 75bps rate hike, as two members of the board voted for a 100bps move due to rising inflation pressures.
Turkey Policy Mistakes
And there are monetary policy Tour de Monde participants who seemingly lost the sense of direction and took the wrong turn… again. Yep, we are talking about Turkey’s decision to cut its policy rate by another 100bps to 12%. Authorities are clearly prioritizing growth in the run up to the elections, as domestic activity is softening. The currency’s relative stability may be a factor in today’s decision, but with annual inflation running around 80% (!), outright rate cuts make absolutely no sense, and they will likely worsen the macroeconomic imbalances (including external ones) going forward. Stay tuned!
Chart at a Glance: Market Raised Its Expectations for the U.S. Fed
Chart at a Glance: Market Raised Its Expectations for the U.S. Fed
Source: Bloomberg LP.
Originally published by VanEck on September 22, 2022.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation– Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI– JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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