EM Central Bank Outlook in the Wake of the Fed

EM Central Bank Outlook in the Wake of the Fed
In light of the Peruvian central bank surprising markets with a 25 bp rate hike to 3.5% earlier this month and the Fed standing pat, we thought a roundup of the other EM central banks would be helpful. 


Brazil kept rates steady this month at 14.25%.  This was the first decision of steady rates since October 2014.  The bank said further tightening was not needed but that rates would be kept high for quite some time.  However, market pricing now suggests a 25 bp hike to 14.5% on October 21, followed by a 50 bp hike to 15% on November 25.  Then two more 50 bp hikes are seen in Q1 2016 (January 20 and March 2) that takes the SELIC rate to 16%.  That’s very aggressive, and is almost certainly due more to risk aversion pushing up the local yield curve than to expectations for actual hikes.  IPCA rose 9.57% y/y in mid-September, well above the 3-7% target range.

The next policy meeting for Chile is on October 15.  CPI rose 5% y/y in August, the high for the cycle and above the 2-4% target rate.  The last move by the central bank was a 25 bp cut to 3.0% in October 2014.  At this month’s meeting, the central bank moved from a neutral bias to a tightening bias with a “short-term timeline.”  This warns of a potential hike in October.  Yet the economy is sluggish and so the tightening cycle is not expected to be an aggressive one.

For Colombia, the next policy meeting is on September 25.  Consensus is for steady rates at 4.5%, but the market is split.  Of the 35 analysts polled by Bloomberg, 11 see a 25 bp hike to 4.75%.  The last move was a 25 bp hike 4.5% in August 2014.  Inflation rose to 4.7% y/y in August, the cycle high and further above the 2-4% target range.  At last month’s meeting, the central bank voted in a split decision to keep rates steady.  This warns of a potential hawkish surprise this month.

Mexico stands out as an exception on the other side of the spectrum.  Inflation is below the 3% target, and is currently at an all-time low near 2.5% and still falling.  Banco de Mexico was the first in the region besides Brazil to take a more hawkish stance, warning at the beginning of this year that it would likely hike rates pre-emptively.  That has not come to pass, but we do see some risk that Mexico hikes rates immediately after the Fed does.  At its policy meeting this week, the central bank kept rates steady but warned of pass-through risks from the weak pesos.  The next policy meeting is October 29 and steady rates are likely then.

Peru’s next central bank meeting is October 15.  Because it hiked at its last meeting, another one so soon seems unlikely.  Yes, inflation of 4% y/y in August is well above the 1-3% target range.  However, the economy remains sluggish and so an aggressive tightening cycle seems unlikely.


The only notable hawkish central bank in this region is the South African Reserve Bank.  It hiked rates 25 bp to 65 back in July.  With the economy still weak, we think the SARB will find it hard to continue its tightening cycle after restarting it with a 25 bp hike to 6% back in July.  Markets are looking for a continuation of the tightening cycle, roughly at a pace of 25 bp per quarter.  This strikes us as too aggressive, and we believe that political realities (unemployment near 25%) will prevent this scenario from unfolding.  Next policy meeting is September 23.

The CEE countries continue to face deflationary pressures.  The central banks of Hungary, Poland, and the Czech Republic are in no hurry to tighten and we see steady policy from all three until at least mid-2016.

Israel central bank meets tomorrow and is expected to keep rates steady at 0.10%.  However, there is a risk of a dovish surprise.  The last move was a 15 bp cut to 0.10% in February.  Officials have been hinting at the potential need for unorthodox policies, as deflation remains persistent.  CPI contracted -0.4% y/y in August, and is well below the 1-3% target range.  The economy remains weak, but for now, it seems the weak shekel will be the main source of stimulus for now.

Russia central bank kept rates steady at 11.0% in September.  CPI inflation has accelerated two straight months to 15.8% y/y in August.  We think steady policy was the right decision in light of rising inflation and the weak ruble.  Any further easing is unlikely until this inflation dynamic improves, which probably won’t be seen until 2016.  The next central bank policy meeting is October 30.

Turkey is problematic.  Inflation has started accelerating again, rising to 7.1% y/y in August.  This is back above the 3-7% target range after one month within it.  Combined with political uncertainty and the weak lira, the central bank will likely be on hold until at least the November 1 elections.  The next policy meeting is October 21, and no change then is expected.  At its policy meeting this week, rates were kept steady and markets were disappointed that the bank did not simplify its policy framework further.


In Asia, most EM countries are experiencing low inflation.  The main exceptions are Indonesia and Malaysia.

With China data still softening, the PBOC is likely to continue its easing cycle.  The last move was a 25 bp cut in its policy rates in August.  CPI rose to 2.0% in August, the highest level this year. Still, inflation is not the main variable in the PBOC’s reaction function. As such, we expected easing to be complemented by further cuts in reserve requirements.

The Reserve Bank of India is likely to resume its easing cycle soon, but not too aggressively.  The last move was a 25 bp cut in its policy rates in June.  The next meeting is September 29, and a 25 bp cut in policy rates is expected.  Price pressures remain low, with CPI rising 3.7% y/y in August, in the bottom of the 2-6% target range.  WPI contracted -5% y/y, pointing to no pipeline pressures. Governor Rajan, however, is also very much focused on banking reform and legal issues pertaining to the independence of the central bank.  Rajan has also made it clear that it fiscal discipline is an important element in the reaction function of the RBI. So the easing cycle will be gradual.

Bank Indonesia faces a quandary.  Like the rest of the region, the economy is slowing.  However, inflation here is too high to allow for easing, especially with the rupiah weakening steadily.  As such, the bank is likely to stay on hold for the foreseeable future.  CPI rose 7.2% y/y in August, well above the 3-5% target range.  The bank is primarily focused on currency stability at the moment and is debating new money market instruments to deal with excess funds.  The next policy meeting is October 15, we see steady rates.

The Bank of Korea remains dovish, leaving the window open for more rate cuts in the near term.  The last move was a 25 bp cut to 1.5% in June, but the decision to cut will depend on “how the global economic condition develops in the future.”  Although core CPI remains elevated at 2.1% y/y, headline is running at a benign 0.7% y/y and is below the 2.5-3.5% target range.  The next meeting is October 15, but this may be too soon to move rates.  We suspect the bank will prefer to see the reaction from the first Fed hike before pulling the trigger.

The Philippine central bank meets tomorrow and is likely to keep rates on hold for the foreseeable future at 4.0%.  Data has come in on the firm side recently, despite the external headwinds.  A lot of the country’s economic performance will hinge on President Aquino’s fiscal plans and implementation of infrastructure expenditures.  June and July were positive months in this regard.  Inflation, however, remains very subdued at 0.6% y/y in August, but upside risks are growing due to the El Nino effect and its pass-through.  Still, monetary policy seems to be roughly in balance at the moment.

Singapore is experiencing deeper deflation risks.  August CPI fell -0.8% y/y, more than the -0.5% y/y consensus and the -0.4% reported in July.  Even core is getting too low at 0.2% y/y.  The MAS does not have an explicit inflation target, but should be concerned that deflation risks appear to be getting stronger.  The economy is slowing, and we think the MAS will ease policy at its October meeting by adjusting its $NEER trading band.  No date has been set yet.  The MAS has been on hold since the last emergency intra-meeting move back in January.

The central bank of Taiwan meets tomorrow and there is some risk of easing.  Rates are at 1.875% and, if the bank moves, they are likely to cut rates by 12.5 bp to 1.75%.  It has been on hold since its last 12.5 bp hike back in 2011.  Data have come in very soft since the last quarterly policy meeting with imports, exports, IP, sales, and GDP all showing weakness.  CPI contracted -0.5% y/y in August, and deflation risks continue to be felt.  Of course, the slowdown in China is the key variable here.

Bank of Thailand kept rates on hold at 1.5% in its meeting last week. It seems as if the bank is leaving further stimulus on the hands of the government and the weaker baht.  The Prime Minister has approved $5.6 bln in stimulus spending that focuses on lower-income groups and small businesses.  Despite outright deflation (with headline CPI contracting -1.2% y/y), the central bank will probably want to see how the fiscal measures impact the broader economy (and possibly wait for the Fed to move) before committing to further action.  The last move was a 25 bp cut to 1.5% in April, and the next policy meeting is November 4.