Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
June 16, 2020
Poland keeps its policy rate on hold, in line with accelerating core inflation, large fiscal stimulus and concerns about negative rates. Colombia suspends its fiscal rule for 2020 and 2021.
Poland’s latest monetary policy meeting was more “normal” in all respects. There were no surprising rate cuts, which—I am happy to report—is in line with a higher than expected core inflation print for May. Yearly core inflation reached 3.8% last month—and the acceleration had been happening pretty much non-stop since early-2019 (see chart below). So, I guess it is getting difficult for the central bank to ignore this fact—especially against the backdrop of a truly massive anti-COVID fiscal package. In addition, several board members believe that negative interest rates can do more harm than good.
Colombia’s government confirmed that it will suspend its fiscal rule for 2020 and 2021. This does not come as a big surprise—the rule did not look particularly “steady” going into the COVID crisis. In addition, international financial organizations (such as the IMF) suggested that this course of action might help to deal with virus-related fiscal constraints. The problem is that this decision comes right after reports about possible pension reform rollbacks, adding to concerns about the overall structural framework.
India is rapidly becoming one of the largest economies in the world. Its share of global GDP is now close to 10% (vs. 4% in 2000, on a purchasing power parity (PPP) basis). So, we keep a very close eye on what’s happening there—both markets and real economy. Regarding the latter, digitization is one big secular trend—listen to the replay of our virtual breakfast with CEO Jan van Eck and Deputy Portfolio Manager Angus Shillington. Regarding the former, India’s inclusion in global bond indices would make a huge difference for many investors. The latest reports suggest that the government is getting more serious in its talks with J.P. Morgan, targeting a 7% index weight for sovereign debt. Stay tuned!
Chart at a Glance: Poland’s Core Inflation – Up-Up and Away!
Source: Bloomberg LP
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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