Emerging Central Banks and Rate Expectations

Brazil: The Monetary Policy Committee (Copom) kept the Selic rate stable at 14.25% p.a. in August. The communiqué indicated that the initiation of an easing cycle would depend on greater certainty of the convergence of IPCA inflation to 4.5% and highlighted the following domestic factors: (i) proof of lesser inflation persistence in response to the current shock in food prices; (ii) more rapid disinflation in the components of the IPCA most sensitive to economic activity; and (iii) greater certainty regarding approval and implementation of the necessary adjustments in the economy. The September Inflation Report mentioned a favorable evolution in recent months of the balance of risks for the three conditions above. Additionally, the central bank suggested that even if inflation in 2017 is still above the center of the target range, it might initiate an easing cycle if its inflation forecasts for the following quarters converge towards the center of the target. As a result, we now expect the central bank to cut the Selic rate by 25bps in October and by 25bps in November. We also expect additional cuts of a cumulative 150bps in 2017.

Mexico: The central bank increased the overnight rate by 50bps to 4.75% in September. Since last December, the central bank has increased the overnight rate by 175bps. The first increase of 25bps was in December 2015, matching the increase in the Fed Funds rate. This was followed by three increases of 50bps each in February, June and September. The bank wrote in the policy statement that the rate increase “does not pretend to start a (monetary policy) tightening cycle”. The bank will remain vigilant of all determinants of inflation and inflation expectations, especially the exchange rate and its possible pass-through to prices. The bank however noted that this does not mean it has an exchange rate target. Other factors the bank will monitor include Mexico’s monetary policy stance relative to that in the US, and the output gap. Based on this guidance, future policy moves will continue to be quite dependent on the behavior of the Mexican peso, in our view. With a victory by Hillary Clinton in the US election (November 8), this recent rate hike could be the last one for a long time. However, we are likely to see additional increases, and potentially substantial ones, if the Mexican peso is under strong weakening pressures.

Russia: The central bank (CBR) cut the policy rate by 50bps, to 10.00%, in September. The decision to cut the policy rate was in line with our consensus-matching forecast. The CBR released a pretty hawkish statement and ruled out further monetary policy easing before 1Q-2Q 2017. The CBR’s main concern was that the market’s expectations of aggressive policy easing (on our estimate, at least 200bps were priced into the rouble cross-currency curve through end-2017 before the meeting) were not consistent with the market’s inflation expectations (the majority of market participants did not expect the CBR to attain its 4% inflation target). At her press conference, Nabiullina mentioned the CBR’s intention to have a less inverted interest rate curve. The CBR’s guidance on future policy rate cuts was the main hawkish element of the statement. We revised lower our expectation for policy rate cuts in the next 15 months to 100bps from 200bps. We expect the policy rate to be 9.00% by the end of 2017. We think the next policy rate cut will take place in 1Q 2017, and expect it to be 50bps.

South Africa: The Reserve Bank’s monetary policy committee (MPC) held the repo policy interest at 7.00% in September and was notably less hawkish in its stance, in our view. The rate decision was in line with our expectation as well as that of consensus (according to Bloomberg). The stance was a surprise to us, given our continued concerns about the rand. The MPC’s rate decision was justified by a revision lower in the Bank’s forecasts for inflation and its continued concerns about GDP growth. On the former, the Bank expects a lower peak in inflation of 6.7% in 4Q 2016. Also, the Bank expects that inflation will enter the inflation target “sustainably” in 2Q 2017, one quarter earlier than its previous estimation. Furthermore, inflation expectations have improved. Despite a revision higher in its estimates for GDP growth, the MPC highlighted numerous weaknesses in the real economy. For 2017, the Bank’s downward inflation trajectory is now sharper and lower than ours, but the profile is broadly similar. If this trajectory proves correct, monetary policy could be unchanged until the end of 2017.

Turkey: The monetary policy committee (MPC) cut the upper end of the interest rate corridor in September. The MPC lowered the upper end of the interest rate corridor by 25bps to 8.25% and kept unchanged the other short-term interest rates (the one-week repo rate at 7.50% and the lower end of the corridor at 7.25%), in line with our consensus-matching forecast. After referring to the mid-July political developments as “a source of financial market volatility” in its July statement and referring to a “slight” slowdown in domestic demand growth in its August statement, the MPC finally acknowledged that there is “a deceleration in the economic activity.” The MPC expects headline inflation “to display a decline in the short term.”

India: In its maiden meeting, the MPC voted unanimously to cut rates by 25 bps – likely wanting to make a move before a potential hike by the US Federal Reserve. The guidance suggested that future decisions will remain data dependent. The RBI highlighted that the rate decision factored in likely moderation in CPI inflation in the next few months, and that the risks to its March 2017 CPI inflation forecast of 5% remain on the upside.

Korea: The Bank of Korea kept its benchmark policy base rate unchanged at 1.25% in October, in-line with expectation. In the policy statement, the BoK turned more cautious on exports. It remained optimistic on domestic demand, but pointed out that increases have been driven mainly by construction activities. We expect the BoK to remain on hold in the nearterm despite headwinds posted by some industry-specific factors. Over the medium term, we maintain our view that the BoK will keep an easing bias, in-line with Governor Lee’s view that there is still room for monetary policy.