For most emerging market central banks, the only way is up
While top central banks such as the Federal Reserve, the ECB and the Bank of Japan may be sitting on their hands as inflation rises, many of their peers in the big developing economies aren’t taking any chances.
Brazil and Russia have already raised interest rates three times this year. China had been in tightening mode until a wobble this month, while Mexico, the Czech Republic and Hungary have all just made their first moves in years. And it looks like just the start.
Despite this week’s global market squalls, a daily JPMorgan reading of financial pricing shows the 18 top emerging markets are expected to deliver the equivalent of 73 standard-sized, 25-basis-point interest rate hikes over the next 12 months, and just over 100 in the next two years.
So where are the biggest moves likely to be? How long could these hiking cycles last? And who are the outliers?
Russia has already hiked three times this year. But with inflation running at its hottest in five years, the central bank is expected to whack interest rates up another 100 basis points on Friday to 6.50% (RUCBIR=ECI).
Will it stop there? Bank of America and Oxford Economics think so, but JPMorgan reckons it will push on to 7% while Capital Economics has forecast 7.25% before year-end.
A survey of more than 100 economists by Brazil’s central bank on Monday predicted its 4.25% benchmark rate will jump to 6.75% by year-end.
Most economists think another hike of at least 75 basis points on Aug. 4 is likely, but 12-month market pricing shows roughly 370 basis points worth of raises, which would leave them near 8% – that’s a long way from the 2% they were at as recently as March.
Mexico took economists by surprise last month when it delivered its first rate increase since 2018. Consensus is for it to lift them another 125 bps by year-end and 175 bps by this time next year, although UBS thinks forward rate agreements (FRA) are pricing in as much as 200 bps.
Big beast China had been steadily tightening monetary policy until some wobbly economic data triggered a reversal this month in the shape of a cut to banks’ reserve requirements.
JPMorgan’s pricing charts still point to a fractional 14 bps worth of tightening over the next year, but that is half of what it was in early May.
India’s headline consumer price inflation hanging around 6% ever since the crisis struck 18 months ago has been one of the puzzles of the pandemic.
It’s a big oil importer, so the sharp rise in crude prices over the last year will keep the pressure on. Economists don’t expect moves to normalise central bank policy – i.e. narrowing of the policy corridor by raising the reverse repo rate – any time soon. But it is being priced for early next year with the equivalent of seven 25-bps hikes then priced over two years.
According to UBS, markets were pricing in as many as five South African rate hikes over the next 12 months before protests boiled over last week. The central bank will probably stay on hold on Thursday but may well prepare markets for an increase in September and potentially another in November.
Hungary and the Czech Republic are leading the charge for eastern Europe after both hiked a day apart from each other in June.
JPMorgan sees the Czechs hiking again in September and November, as well as an outside chance of an August surprise. Hungary is expected to repeat June’s 30-bps hike next week and add further 15 bps increments in September and December. Poland meanwhile is the lagard.
South Korea could become the first Asian economy to hike next month with inflation running up and amid concerns about an overheating property market and household debt stress.
Colombia is second behind Brazil in terms of market pricing of future hikes, although protests, some poor data and the loss of two investment grade ratings in quick succession mean lift-off might not happen until September.
Chile is seen hoisting its 0.5% rates to 2% between now and the end of the year. Kazakhstan’s 9% inflation is expected to see it move too, while Ukraine, which has hiked twice already this year, has 9.5% inflation analysts at BlueBay highlight.
New COVID waves will likely keep other Asian countries such as Indonesia, Malaysia, the Philippines and Thailand on hold.
President Tayyip Erdogan’s pressure means Turkey is the only heavyweight emerging market priced to make a significant-sized cut in the next 12 months. Yet the 100-basis-point drop priced into JPMorgan’s markets data would only take them down to 18% – still the highest rate of any sizable world economy.