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  • Emerging Markets Debt Daily

    Brazil Rate Cuts – Uncharted Territory?

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    September 19, 2019

    The Brazilian central bank delivered a very dovish rate cut yesterday - not only lowering the key rate by 50bps to 5.5% but also signaling that there is room for more. The high level of slack in the economy certainly justifies the central bank’s stance. The government’s success in passing the social security reform removes a major fiscal constraint on monetary authorities. Many observers now believe that Brazil’s policy rate can fall below 5% - an unprecedented level, but also the logical result of far-reaching structural adjustments.

    The central bank of Indonesia’s message was unequivocally dovish as well. The bank delivered its third consecutive cut earlier today, bringing the key rate to 5.25%. It also lowered the loans-to-funding ratio for banks, and signaled more easing in the future - in order to address concerns about the external and domestic growth environment.

    Even though South Africa’s growth is weak and inflation remains within the target band, the central bank could not afford the luxury of cutting the key rate today. The board was concerned about inflation expectations. There were also structural reasons - uncertainty about the state utilities restructuring plan and the government’s medium-term fiscal and debt trajectories. Both factors can affect the outcome of the sovereign rating review by Moody’s, which is expected to take place within the next two months.


    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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