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  • Emerging Markets Debt Daily

    Rate Cut Race to the Bottom Heats Up

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    March 19, 2020

    EM central banks continued to cut rates in quick succession. The U.S. Federal Reserve corrected the last week’s policy mistake, opening FX swap lines with several major EM central banks.

    Emerging Markets (EM) central banks continue to cut rates in quick succession. Earlier moves in EM in Europe were followed by two cuts in Asia this morning—in Indonesia (25bps) and the Philippines (50bps). Malaysia’s central bank also reduced the statutory reserve ratio for banks by 100bps to 2%. In Latin America, Brazil predictably lowered the SELIC rate1by 50bps yesterday. Not to be outdone, South Africa’s central bank unanimously voted for a 100bps cut, surprising the consensus that was expecting “mere” 50bps. Monetary authorities in EM are pulling the trigger despite weaker currencies, focusing on the preservation of international reserves and letting FX to act as a shock-absorber that should help to rebalance their economies in due course. Positive real interest rates in many EM give central banks more space to stimulate legitimately, albeit the cascading global impact of the coronavirus and widening movement restrictions mean that the positive effect will be pushed further into the future. 

    The U.S. Federal Reserve (Fed) made a very important policy move this morning, opening FX swap lines with several major EM central banks, including Brazil and Mexico. South Korea, Singapore and Australia were also among the “chosen” ones (we had a lively debate today whether Australia should now be considered a classic emerging market, with both rates and FX selling off after the Reserve Bank of Australia (RBA) rate cut). The Fed corrected last week’s big mistake, providing U.S. dollar liquidity and (hopefully) preventing vicious sell-off cycles that stem from elevated USD demand.

    It didn’t take too long for central banks in EM and parts of developed markets (DM)(US, UK) to realize that the policy response to the crisis should be fast and sizable. It now looks like the European Central Bank (ECB) is finally coming to its senses. The approval of a EUR750B Pandemic Emergency Purchase Program (PEPP) was well-received by analysts. It follows German Chancellor Merkel’s (watershed) comment that it might consider joint bonds with other Eurozone countries to fight the virus. The one-two policy punch had a limited (for now) impact on the markets, which suffer from poor liquidity and have a clear preference for cash. But this is a good start.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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