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  • Emerging Markets Debt Daily

    Fears about South Africa Central Bank’s Independence

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    March 06, 2019

    South African President Cyril Ramaphosa’s plan to nationalize the central bank raises concerns about its independence. Lower headline inflation in Mexico is unlikely to push the central bank in a more dovish direction.  

    South Africa’s bullish current accountprint
    (a smaller than expected deficit of 2.2% of gross domestic product (GDP)) was overshadowed by headlines that President Ramaphosa wants to proceed with the central bank’s nationalization. The main concern at this stage is that the move will undermine the central bank’s independence and policy credibility—the African National Congress' (ANC’s) 2019 election manifesto specifically calls for a more flexible monetary policy regime that would take into account not just price stability but also job creation and economic growth. Predictably, the rand reacted poorly to the news, slipping by 121bps vs. U.S. dollar as of 10:20 a.m. ET (according to Bloomberg LP).  

    Mexico’s headline inflation continued to moderate at a brisk pace in February, falling to 3.94% year-on-year (see chart below). This, however, is unlikely to push the central bank in a more dovish direction any time soon. Core inflation looks sticky despite softening cyclical conditions, exceeding expectations in February and staying close to 3.6% year-on-year since May 2018, while President Andres Manuel Lopez Obrador’s policies pose risks to the fiscal outlook. The central bank believes that these are the reasons why Mexico needs a relatively high real policy rate.

    The EUR/USD cross was down this morning—together with many risky assets—following big cuts in the European Central Bank (ECB) forecasts, a change in its guidance, and President Mario Draghi’s very dovish press conference. The ECB said it will resurrect 2-year targeted long-term loans (TLTROs) in September and keep rates on hold at least through 2019, hoping that the “pivot” will help to improve the region’s growth prospects (the real GDP projection for 2019 is now only 1.1%).  

    Chart at a Glance

    Mexico Inflation

    Source: Bloomberg LP

    1Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments, and net transfer payments.


    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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