Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 17, 2020
South Africa’s central bank (SARB) delivered a hawkish surprise this morning, leaving the benchmark rate on hold at 3.5% against the consensus expectation of a 25bps rate cut. The decision was made despite more pessimistic growth forecasts, lower inflation projections and volatile external conditions. The most important takeaway from Governor Lesetja Kganyago’s comment? “Monetary policy alone cannot improve the potential growth rate of the economy or reduce fiscal risks”. Amen!
There was little appetite for rate cuts elsewhere in emerging markets (EM). Brazil’s monetary policy council kept the benchmark rate at 2%. The text of the statement leaves the door open for small cuts. However, the benchmark rate is already at the historic low. Against this backdrop, a combination of stronger than expected recovery and massive COVID-related fiscal expansion argues against additional monetary easing at this stage.
Indonesia’s central bank is watched very closely these days, as the recent plans to change the central bank act raised legitimate concerns about its independence. So, the decision to stay on hold today (at 4%) was much appreciated. The communication shows that the currency stability and overall financial stability remain important factors that determine the pace of rate cuts. Another major consideration is that the central bank is expected to step up purchases of government bonds, which is also a form of monetary easing.
IMPORTANT DEFINITIONS & DISCLOSURES
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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