What Has Changed in EM

  • Bank of Korea started the easing cycle with a 25 bp cut to 1.5%
  • Bank Indonesia started the easing cycle with a 25 bp cut to 5.75%
  • Fitch raised the outlook on Thailand’s BBB+ rating from stable to positive
  • South African Reserve Bank started the easing cycle with a 25 bp cut to 6.5%
  • Reports suggest Brazil President Bolsonaro is preparing new measures to boost the economy
  • Chile central bank delivered a dovish hold

Bank of Korea started the easing cycle with a 25 bp cut to 1.5%. The market was split between no move and a 25 bp cut. This cut takes back the 25 bp hike in November. The economy remains sluggish and headwinds from the US-China trade war remain strong and likely to be ongoing, and so further cuts seem likely. BOK cut its growth and inflation forecasts for this year to 2.2% and 0.7%, respectively.

Bank Indonesia started the easing cycle with a 25 bp cut to 5.75%, as expected. CPI rose 3.3% y/y in June, below the 3.5% target but within the 2.5-4.5% target range.   The bank hiked rates 175 bp last year and so we believe that this cut is just the start of an extended easing cycle. Indeed, Governor Warjiyo that a prolonged trade war means downside risks to the bank’s growth forecasts.

Fitch raised the outlook on Thailand’s BBB+ rating from stable to positive. It cited greater resilience to macro shocks as a major factor, which in turn was due to strong external and budgetary positions. Fitch did express some concern about the stability of the new coalition government. Our own sovereign ratings model shows Thailand’s implied rating fell a notch to A-/A3/A-, reversing last quarter’s gain. Still, there remains upgrade potential for actual ratings of BBB+/Baa1/BBB+.

South African Reserve Bank started the easing cycle with a 25 bp cut to 6.5%, as expected. The last move was a 25 bp hike back in November. The bank cut its 2019 growth and average inflation forecasts to 0.6% and 4.4%, respectively. Its model implies this is a one and done move but we don’t believe it. With the rest of the world in easing mode, we think SARB will take advantage of every opportunity to cut rates.

Reports suggest Brazil President Bolsonaro is preparing new measures to boost the economy. His economic team will reportedly present two proposals to choose from. Elsewhere, the CDI market is pricing in 100 bp of easing ahead, starting with a 50 bp cut at the next COPOM meeting July 31. This seems to aggressive given that passage of pension reforms is still in the early stages.

Chile central bank delivered a dovish hold. The vote was 4-1, with one policymaker calling for a 25 bp cut. The bank noted that if inflation and growth remain low, it may “be necessary to increase the current monetary stimulus, in a magnitude that would be evaluated” in the next quarterly report in September. Next policy meeting is September 30 and the decision will be data-dependent.