What Has Changed in EM

  • PBOC lowered the 1-year loan prime rate 5 bp to 4.20%
  • Moody’s cut the outlook on its Aa2 rating for Hong Kong from stable to negative
  • India announced corporate tax cuts worth about $20.5 bln to boost the economy
  • Indonesia cut rates 25 bp to 5.25%
  • Israel Prime Minister Netanyahu’s election gamble failed to pay off
  • Argentina central bank raised the floor for its benchmark interest rate to 78% from 58% for the rest of September
  • Brazil COPOM cut rates 50 bp to 5.5%

PBOC lowered the 1-year loan prime rate 5 bp to 4.20%, as expected.  However, it left the 5-year LPR steady at 4.85%.  Under the new framework, the central bank sets these benchmark reference rates on the 20th of each month.  Policymakers have been easing policy steadily in recent months but have refrained from aggressive rate cuts.  We believe this strategy will continue as the trade war extends with no end in sight.

Moody’s cut the outlook on its Aa2 rating for Hong Kong from stable to negative. The agency said the change reflects rising risks that ongoing protests erode the strength of Hong Kong’s institutions and damage its attractiveness as a trade and financial hub. This comes after Fitch downgraded Hong Kong one notch to AA with negative outlook earlier this month.

India announced corporate tax cuts worth about $20.5 bln to boost the economy.  The move is risky, as slow growth has already strained the budget and endangered the government’s fiscal targets.  S&P said it was a credit negative development and we agree. Yesterday, RBI Governor Das said there’s room for further easing due to low inflation.  Next RBI meeting is October 4 and another rate cut is likely then.

Bank Indonesia cut rates 25 bp to 5.25%, as expected.  A handful of analysts saw no cut.  The bank also announced a series of macroprudential measures that are meant to boost bank lending.  CPI rose 3.5% in August, right in the middle of the 2.5-4.5% target range.  With growth expected to remain sluggish, we expect easing to continue into next year.  Next policy meeting is October 24 and another cut is possible then.

Israel Prime Minister Netanyahu’s election gamble failed to pay off. With nearly all votes counted, the center-right bloc led by Likud holds 55 seats and the center-left bloc led by Blue and White holds 57 seats each.  That leaves Lieberman as the kingmaker with his party’s 8 seats and reports suggest he will recommend Blue and White leader Benny Gantz as the next premier.

Argentina central bank raised the floor for its benchmark interest rate to 78% from 58% for the rest of September. It said the floor will fall to 68% for October and noted that “The monetary policy committee considers these measures will allow for real positive interest rates to be sustained and to restart the disinflation process starting in October.”  The government just announced a 4% hike in gas prices.

Brazil COPOM cut rates 50 bp to 5.5%, as expected.  The decision was unanimous, and it noted “The consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus.” Markets are pricing in another 50 bp cut October 30 that would take the policy rate down to another record low of 5.0%.  This would be a risky move, as the risk premium paid for holding Brazil assets would be nearly non-existent.