23 July 2021
VanEck Blogs | Emerging Markets Debt Daily
EM Rate Hawks – First In, First Out?

Russia delivered a hefty 100bps rate hike, but signaled that it might take a pause. Brazil cannot afford such luxury yet, as mid-month inflation accelerated to 8.59% year-on-year.

Do you still think that Russia is “a riddle wrapped in a mystery inside an enigma”? Not anymore. It is all very transparent these days – at least as regards monetary policy guidance. All you need to do is to look at one of Governor’s Nabiullina’s awesome brooches that she wears at her press conferences. Today’s was “a cloud with rain drops” (see picture below), and this probably means that the central bank (CBR) intends to rain on the hawkish parade (=take a pause) after a hefty 100bps rate hike. Easy!

Russia’s brooch example is actually quite interesting. For most of this year, we were focusing on the timing of rate hikes – both in emerging markets (EM) and developed markets (DM). But the change in the CBR’s tone begs a different question – if a central bank does a ton of aggressive frontloaded tightening (like Russia) in response to rapidly rising inflation (just as a “grown-up” institution with the inflation-targeting mandate should do), is it time to think about rate cuts somewhere down the road? The market currently prices in approximately 60bps of cuts in Russia in 6 to 12 month. But these expected (albeit still remote) cuts would not be in the same category as China’s recent “blanket” 50bps cut in the reserve requirements for banks. The latter was a response to the near-term growth/liquidity hiccups, and the current expectation is that China’s policy normalization would resume once these risks fade away. Russia’s future rate cut(s) would be a more natural evolution of an uninterrupted monetary policy cycle over time.

And just in case you were wondering (and in line with our motto “EM is not a monolith”), we are still in (or getting close to) the first part of the tightening-easing policy sequence in most EMs. Take Brazil, for example. Brazil’s mid-month inflation accelerated at a faster pace than expected, reaching 8.59% year-on-year. This means that the real policy rate is very negative (about -4%), which is why the local swap curve continues to price in a 93bps rate hike in August, followed by 223bps more in the rest of the year. Stay tuned!  

Charts at a Glance: Russia Sends a Clear Policy Signal without a Single Word

Charts at a Glance: Russia Sends a Clear Policy Signal without a Single Word

Source: Screenshot from the Central Bank of Russia Press Conference, 23 July 2021


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Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy