What Has Changed in EM

  • Bank Indonesia delivered a dovish hold
  • A group of Democratic US Senators is proposing new sanctions on Russia
  • Reports suggest the US is weighing new sanctions on Turkey
  • Brazil COPOM delivered a dovish hold

Bank Indonesia delivered a dovish hold. It kept rates steady at 6.0% but cut the reserve ratio by 50 bp. Governor Warjiyo said that a cut was a “matter of timing.” Next policy meeting is July 18. If inflation remains under control as we expect, the bank is likely to start the easing cycle then with a 25 bp cut.

A group of Democratic US Senators is proposing new sanctions on Russia. The package would punish Russia for election interference and is meant to discourage future meddling. The proposal targets Russian sovereign debt, Russian banks and Russian-backed LNG projects. The bill would need Republican support to pass.

Reports suggest the US is weighing new sanctions on Turkey. Three sanctions packages are being discussed of varying degree, but the most severe one would reportedly cripple the economy. Sanctions would be retaliation for Turkey going forward with its decision to buy a missile defense system from Russia. President Trump reportedly doesn’t want to decide until after the G20 meeting, where he is likely to meet with President Erdogan.

Brazil COPOM delivered a dovish hold. It noted that progress on structural reforms was “essential” for interest rates to fall. Timing of a possible rate cut is tricky given the slow progress of pension reform in Congress, where we have penciled in Q4 passage. The CDI market is pricing in two cuts by year-end that would take the SELIC rate down to 6.0%, while the most recent weekly central bank survey shows market expectations for a year-end SELIC rate of 5.75%. Next policy meeting is July 31, which seems too soon for a cut.