EM rate hikes – no end in sight
By Natalia Gurushina
Chief Economist, Emerging Markets Bond Strategy, VanEck
Central Europe’s “double punch” policy – a 75bp rate hike in Poland and 125bp in the Czech Republic – has received a lot of attention. Despite aggressive rate hikes, the market continued to forecast further tightening in the coming months
There is a popular saying (in one of the emerging markets (EM)) that says appetite comes with eating – and this is exactly what is happening with market expectations for policy standardization. Although many central banks of Emerging markets accelerate rate hikes at present, market prices in more and more increases for the next 12 months. The graph below shows that policy rates in most emerging countries are now expected to exceed pre-COVID levels (sometimes significantly) in the coming months.
One obvious reason why this happens is that past tightening was not enough to stem inflation, which not only continues to surprise on the upside in many emerging markets, but is also 2-3 standard deviations greater than the multi-year means. We’ve seen this happen in Poland (3.1 standard deviations), South Korea (2.5 standard deviations), and Peru (mind-boggling 4.3 standard deviations) over the last week or so. Yesterday’s bullish surprise in Russia was the last in a series – headline and core inflation are now above 8% year-on-year, well above the official target. The talk of global ‘stagflation’ is quite popular right now, but the truth is that the pace of recovery in many emerging markets is faster than expected, giving central banks extra leeway to tighten their policies. .
A region with a major hawkish policy U-turn is Central Europe. Poland was the last to begin policy normalization in October, and it has a lot of catching up to do despite two aggressive rate hikes totaling 115bp. Yesterday’s above-consensus rate hike in Poland was quickly followed by a 125bp movement in the Czech Republic (vs. 75bp expected). The crown reacted extremely well, gaining 52 basis points against the euro (at 10:40 a.m. ET, according to Bloomberg LP). Will Romania follow suit next week? Stay tuned!
Chart at a glance: Market prices during aggressive rate hikes in many emerging markets
Source: VanEck research; Bloomberg LP
Originally posted by VanEck on Nov 3, 2021.
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PMI Index – Purchasing Managers: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion and a reading below 50 indicates contraction; 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 – Price index of personal consumption expenditure: 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 analysis tools, fixed income securities, hedge fund market indices 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 governments in emerging markets; EMBI – JP Morgan Emerging Markets Bond Index: 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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