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  • Emerging Markets Debt Daily

    EM Rate Hawks – First In, First Out?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 23, 2021

    Russia delivered a hefty 100bps rate hike, but signaled that it might take a pause. Brazil cannot afford such luxury yet, as mid-month inflation accelerated to 8.59% year-on-year.

    Do you still think that Russia is “a riddle wrapped in a mystery inside an enigma”? Not anymore. It is all very transparent these days – at least as regards monetary policy guidance. All you need to do is to look at one of Governor’s Nabiullina’s awesome brooches that she wears at her press conferences. Today’s was “a cloud with rain drops” (see picture below), and this probably means that the central bank (CBR) intends to rain on the hawkish parade (=take a pause) after a hefty 100bps rate hike. Easy!

    Russia’s brooch example is actually quite interesting. For most of this year, we were focusing on the timing of rate hikes – both in emerging markets (EM) and developed markets (DM). But the change in the CBR’s tone begs a different question – if a central bank does a ton of aggressive frontloaded tightening (like Russia) in response to rapidly rising inflation (just as a “grown-up” institution with the inflation-targeting mandate should do), is it time to think about rate cuts somewhere down the road? The market currently prices in approximately 60bps of cuts in Russia in 6 to 12 month. But these expected (albeit still remote) cuts would not be in the same category as China’s recent “blanket” 50bps cut in the reserve requirements for banks. The latter was a response to the near-term growth/liquidity hiccups, and the current expectation is that China’s policy normalization would resume once these risks fade away. Russia’s future rate cut(s) would be a more natural evolution of an uninterrupted monetary policy cycle over time.

    And just in case you were wondering (and in line with our motto “EM is not a monolith”), we are still in (or getting close to) the first part of the tightening-easing policy sequence in most EMs. Take Brazil, for example. Brazil’s mid-month inflation accelerated at a faster pace than expected, reaching 8.59% year-on-year. This means that the real policy rate is very negative (about -4%), which is why the local swap curve continues to price in a 93bps rate hike in August, followed by 223bps more in the rest of the year. Stay tuned!  

    Charts at a Glance: Russia Sends a Clear Policy Signal without a Single Word

    Charts at a Glance: Russia Sends a Clear Policy Signal without a Single Word

    Source: Screenshot from the Central Bank of Russia Press Conference, 23 July 2021

  • PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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