All Kinds of Pivots In EM

04 August 2022

Read Time 2 MIN

 

Summary

Brazil earned its right to exit its aggressive tightening cycle. Can other EMs be as successful in monetary policy adjustment?

Ending EM Rate Hike Cycles

Consider the following scenario - the end of the tightening cycle in 2022 and potential rate cuts in 2023. Nope, we are not talking about the market expectations for the U.S. Federal Reserve. This is a very likely new monetary policy trajectory in Brazil, following what might have been the final 50bps rate hike yesterday (see chart below). Brazil was hiking aggressively starting from early 2021, but all good (monetary policy) things eventually come to an end. A dovish tweak in yesterday’s statement - evaluating rather than foreseeing the need for a residual policy rate adjustment - suggests that the central bank might take a pause already at the next meeting. The end-result of the central bank’s preemptive policy response and peaking inflation is that Brazil’s real yields adjusted by expected inflation are among the highest in emerging markets (EM) (up to 10 years) relative to economic fundamentals.

EMs Falling Behind The Curve

Brazil’s dovish pivot was completely justified - something that cannot be said about the Czech National Bank, which surprised the market by staying on hold today. Granted, the expected rate hike was small (only 25bps), a big share of inflation is driven by external factors, and there are legitimate concerns about an H2 growth “cliff”. Still, taking a pause when annual inflation is above 17% has all the appearance of a policy mistake.

EM Liftoffs And Wider Policy Agenda

Not all policy pivots in EM are dovish. Central banks in EM Asia are on a hawkish offensive - we keep an eye on India this week, and Thailand on Aug 10 (the market expects a 25bps liftoff, which is long overdue). Some EM rate hikes look dramatic on a surface, but the overall policy framework is so weak that rate hikes by themselves would not make a lot of difference. We are talking, of course, about Argentina, where the central bank recently hiked by 800bps, but yesterday’s stabilization plan looked less impressive. The proposals had a shiny “wrapper” - four pillars and such. But there were no changes in the currency regime and only cosmetic fiscal measures. If these issues are not fixed, the current crisis will deepen further. Stay tuned!

Chart at a Glance: Brazil’s Tightening Cycle - Ready To Exit

Chart at a Glance: Brazil’s Tightening Cycle - Ready To Exit

Source: Bloomberg LP

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