Rate Cuts – On the Chopping Block?

EM Policy Rate Expectations

Various emerging markets (EM) central banks continue to signal that while they are happy to end their tightening cycles, the bar for rate cuts is still high. The latest monetary policy communications in the Czech Republic, Hungary, Brazil, Malaysia and Thailand were surprisingly hawkish. The Bank of Thailand signaled more tightening as the economy continues to rebound. The Czech National Bank explicitly warned the market against “premature” bets on rate cuts, even suggesting that that policy rate might not have peaked yet. The Malaysian central bank cautioned that we are “not out of the woods on inflation”, and South Africa actually re-accelerated the pace of tightening last month.

EM Disinflation

The market seems to be OK with the “rate cuts delayed” narrative, seeing no noticeable easing until Q4 (see chart below). Uncertainty about global growth and the impact of geopolitics/China’s rebound on commodity prices are good reasons for being vigilant. Uneven or slower than expected disinflation also argues for policy caution. Sticky core inflation/inflation expectations are a problem for many central bankers – South Korean inflation prints for March illustrate this point really well. Some board members would prefer inflation to get closer to the target range (or the current benchmark rate) before initiating rate cuts – this was a message from the Romanian central bank earlier today, and we might hear similar undertones from the Chilean central bank in the afternoon.

EM Rate Cuts

Some factors, however, might pave the way for earlier/larger rate cuts. Real policy rates based on expected inflation are getting really high in some EMs, threatening the growth outlook in a situation when fiscal space is getting more limited. The pace of fiscal adjustment is key here (as this might affect inflation expectations) – with Brazil being a prime candidate for the policy rate re-pricing, if the new fiscal framework is deemed credible. We also keep an eye on “the mother of all base effects” that should have a stronger anti-inflation impact in the coming months. Finally, EM FX spectacular performance so far this year can also speed up disinflation, easing pressure on EM central banks and opening more room for rate cuts. Stay tuned!

Chart at a Glance: EM Rate Cuts – No Rush For Now

Source: VanEck Research; Bloomberg LP.