High Expectations Abound

19 September 2022

Read Time 2 MIN

The market expectations for DM remain elevated. EM generally expected to continue hiking as well, but Brazil might end its tightening cycle this week.

Aggressive Rate Hikes in DM

Global inflation surprises might be rolling over (see chart below), but the market expectations for major central banks remain elevated. As of this morning, the Fed Funds Futures were fully pricing in a 75bps rate hike and a 21% probability of a larger 100bps rate hike on Wednesday. And the European swap curve was pricing in another 75bps rate hike by the ECB in October. The reason, of course, is that inflation is still very high, and is not expected to return to target (2%) until sometime in 2024 (according to Bloomberg LP consensus). The return–to–target inflation prospects in emerging markets (EM) are not particularly bright either, but there are greater regional variations.

EM Asia Policy Normalization

EM Asia is expected to get to target a few quarters sooner than peers in EMEA and LATAM. Further, even though headline inflation is currently above the target in all regional economies, except China, the deviation from the target is generally smaller than in other regions. This helps to explain why rate hike frontloading in EM Asia looks less aggressive. And this will be reflected in this week’s rate–setting decisions in Indonesia and the Philippines. The Indonesian central bank is expected to continue tightening at a very moderate pace (+25bps). The BSP (the central bank of the Philippines) is expected to opt for +50bps, as demand side price pressures are felt more strongly there and the current account is in deficit (unlike Indonesia’s surplus).

Changing Pace of EM Hikes

In EMEA, this week’s attention will be firmly on South Africa, where the consensus sees the continuation of unusually large hikes (+75bps) together with hawkish policy bias. An element of suspense, however, comes from the fact that the central bank’s decision will be preceded by the August inflation release, and this might tip the balance in favor of 75bps or a more moderate 50bps hike. In LATAM, neither the consensus not the swap curve see a change in Brazil’s policy rate later this week. In fact, the market does not treat it as a routine interest rate pause, but as the end of the current tightening cycle, with a possibility of a rate cut on a 6–12 month horizon. Is the market ignoring the central bank governor’s very hawkish comment that a hike might still be on the table? Stay tuned!

Chart at a Glance: Global Inflation Surprises Started To Roll Over

Chart at a Glance: Global Inflation Surprises Started To Roll Over

Source: Bloomberg LP.

Citi Inflation Surprise Indices measure price surprises relative to market expectations.


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