EM Gutsy policy moves keep coming

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By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Emerging markets continue to offer bold policy moves, but not all of them are positive (like the oversized rate hike in Hungary). Poland’s below-consensus policy rate hike puts it further behind the curve.

Increase in EM tariffs

The morning title on the Central Bank of the Philippines (BSP) set for 50 basis point rate hike by August look at Impressive. We even came up with a good idea for the title of the blog – something along the lines of “Asia’s emerging market (EM) central banks are in a mood to preload rate hikes”. But then we have another round of policy rate “fireworks” in Hungarya huge and surprising increase of 200 basis points in the 1-week deposit rate, which followed an equally striking 185 basis point increase in the base rate about a week ago. It is hard to believe that the Hungarian National Bank (NBH) is in close regional proximity to the ECB… But we digressed. The BNH’s motivations were twofold: persistent inflationary pressures and currency weakness (the latter being one of the main reasons why Hungarian local bonds posted by far the worst total return since the start of the year among all GBI-EM components). The hikes pushed Hungary’s inflation-adjusted real policy rate (ex-ante) well into positive territory (see chart below), reducing pressure to anticipate further tightening going forward.

Emerging markets ahead or behind?

Mexico’s real ex ante policy rate also looks quite healthy after the last rate hike of 75 basis points. So the central bank need to do +75 basis points more after today’s inflation prints? Annual headline inflation is “flirting” with 8%, and core inflation rose in June (although a bit less than expected). The next batch of bi-weekly CPI prints on July 22 would be key to watch. Unlike Hungary or Mexico, Poland’s real ex ante policy rate is quite depressing (see table below). So today’s below-consensus rate hike of 50 basis points also falls into the “bold” category, but with a negative sign.

The challenge of Chinese infrastructure to support growth

Central banks aren’t the only entities in emerging markets anticipating policy responses, governments can too – China announces special $200 billion bond sale is a good example. Bond sales will be from the 2023 quotaand they are considerable (similar to an average monthly increase in new yuan loans over the past few years) – that’s a brave part. Howeverthe movement is supply/infrastructure driven – as demand remains “orphaned”, raising concerns about the lopsided recovery. A related “global” question is whether Europe’s growth can piggyback on China’s rebound via trade channels – as one would normally expect. Or would Europe’s gas supply problems weaken this link in 2022? Stay tuned!

Chart at a glance: Real policy rates in emerging markets: some look better, others lag

Source: VanEck research; Bloomberg LP

Originally published by VanEck on July 7, 2022.

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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both 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, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock 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 implied volatilities on S&P 500 index options; GBI-EM – JP Morgan 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: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

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