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  • Emerging Markets Debt Daily

    EM Rates – Easing Ends

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    December 16, 2020

    The average EM policy rate is grinding higher, and the list of countries where the market sees 2021 rate hikes is getting longer.

    Today is a big rate-setting day in emerging markets (EM), and so far all central banks have kept policy rates unchanged, signaling that we are approaching the end of the easing cycle. The reasons for staying on hold were different, but they provide a useful checklist for other EMs. Indonesia’s central bank expects a stronger recovery next year, and the focus is on policy transmission following 225bps of rate cuts since mid-2019. The central bank of the Philippines is eyeing price dynamics―the 2021 inflation projection was raised to reflect supply-side pressures. The governor of the Czech National Bank drew attention to the fact that the government’s fiscal policy might be looser than expected, maintaining the forecast for 2021 rate hikes. 

    One country where the central bank can potentially go for a small rate cut this afternoon is Mexico. First, we had a series of downside inflation surprises there, which pushed headline inflation back into the target range―which freed some policy space. Second, the pace of recovery is still slow, the latest activity gauges are still deep in contraction zone, and the government is not in the mood to provide fiscal support. But this is a close call―the consensus believes Mexico’s benchmark rate will remain unchanged at 4.25%. 

    Policy tightening in Turkey had already pushed the aggregate EM benchmark rate higher (see chart below). Looking forward, the EM reflation buzz is getting stronger, and the list of countries where the market is pricing in rate hikes is getting longer. It now includes Chile, Brazil, Colombia, the Czech Republic, South Africa, China, India, South Korea, Thailand, the Philippines and even Poland (8bps).

    Chart at a Glance: Aggregate EM Policy Rate Is Edging Higher


    Source: VanEck Research; Bloomberg LP


    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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