Elections Matter – Colombia’s Policy Agenda
The market continues to price in more rate hikes in developed markets (DM), and the question is how emerging markets (EM) policy-makers will respond to this changing environment, especially if there are major shifts on the political front – like in Colombia. Leftist presidential candidate Gustavo Petro emerged victorious in the weekend’s runoff, raising concerns about the country’s policy agenda (both substance and sequencing) and institutional stability. The focus now shifts to the new cabinet’s lineup – the experience of Colombia’s regional peers shows that market-friendly names can do wonders for the market sentiment. At least one rating agency – S&P – decided to fire a warning shot saying that it can downgrade Colombia if the new policy agenda negatively affects the growth trajectory.
Brazil Ready To Wind Down Its Tightening Cycle
The policy agenda (especially the fiscal side) will be closely watched in another major Latin America (LATAM) economy – Brazil – as we are getting closer to the presidential elections. But for now, the market believes that this should not prevent the central bank from winding down its tightening cycle in the next few months. Aggressive policy frontloading pushed Brazil’s real policy rate well into restrictive zone (i.e. above neutral rate - see chart below). So, even though the central bank minutes released today sounded very hawkish, the market expectations for rate hikes are fizzling out – the local swap curve now prices in less than +40bps for August, and around 20bps for September.
EM Central Banks – Follow The Fed?
Brazil is not the only country which might exit the hiking cycle soon. Another central bank on our watch list is the Czech National Bank (CNB) – but the reasons are more worrisome. The CNB’s most outspoken hawks had been purged, and their replacements (including incoming Governor) are decidedly more dovish. A large “goodbye” rate hike tomorrow can put the CNB on hold for a long time despite high inflation pressures - and it even raises the possibility of a subsequent rate cut, which would be a bad case scenario. Post-Fed monetary policy convictions will also be tested in Mexico (+75bps or +100bps?), the Philippines (another +25bps or more?), and Indonesia (finally, a proper rate hike?). So, stay tuned!
Chart at a Glance: Brazil – Aggressive Rate Hikes Pave the Way for Exiting the Cycle
Source: VanEck Research; Bloomberg LP