BYes Natalia Gurushina, Chief Economist, Emerging Markets Bond Strategy
Brazil maintained the same pace of rate hikes (75bp) and guidance. Turkey remained on hold with a seemingly hawkish statement – but is it only lip service?
“More of the same” – The Brazilian central bank continued to anticipate rate hikes, maintaining the same pace (75bp), the same guidance (75bp) and the same reasoning (“partial normalization”). A less uncertain fiscal environment has eased pressure on the central bank to act more aggressively in the short term. However, the real policy rate remains deeply negative (see graph below), which is not the best configuration in a context of rising inflation. The emerging narrative is that Brazil is on its way to a buyout policy – the measured central bank tightening would do just fine.
” Reluctanlty ? “ – Turkey has kept the key rate at 19%, with seemingly cautious verbiage (the kind of keeping policies tight until inflation is much lower). The next central bank move is almost 100% certain to cut rates – the question is when and by how much. Most commentators agree that there is no room for a reduction until much later this year (fundamentally). The governor, however, estimates that inflation will peak in April – hence concerns that he might opt for a token cut (50bp) at the next meeting.
“Viral concerns” – The resurgence of COVID – and especially its impact on growth – has dominated rate-setting meetings in the Czech Republic, Malaysia and Thailand. All three central banks remained on hold in April, but the Czechs appear to be the most poised to rise once the pandemic situation becomes clearer. One factor that could affect the Czech timeline is the appreciation of the currency. The market has clearly noticed the country’s inflationary pressures and a very solid growth rebound – and the central bank knows from experience that a stronger currency can serve as a substitute for rate hikes.
Chart Snapshot: Brazil – Real Policy Rate Still Deep Negative
Source: VanEck research, Bloomberg LP
Originally published by VanEck, 5/6/21
IMPORTANT DEFINITIONS AND DISCLOSURES
PMI Index – Purchasing Managers: economic indicators derived from monthly surveys of private sector companies; ISM – PMI Supply Management Institute: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; both in manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer price index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, which tracks changes in the prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: a US provider of equity, fixed income, hedge fund and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using the volatilities implied on the options of the S&P 500 Index .; 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 Emerging Markets Bond Index: the JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Global Emerging Markets Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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