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Missing Targets, Departing Hawks

June 22, 2022

Read Time 2 MIN

Have EMs done enough policy tightening? This remains an important question as DMs act more hawkish and EM inflation prints leave official target ranges at an alarming pace.

EM Inflation Targets

The number of major emerging markets (EM) with headline inflation still below the target is now down to two – China and Indonesia (see chart below). This happened after South Africa’s inflation overshot the consensus in May – accelerating to 6.5% year-on-year and saying “Goodbye” to the target range. A good thing is that the South African central bank (SARB) has already started its tightening cycle. Another good thing is that the upside inflation surprise was driven mostly by food and fuel – core inflation rose significantly less in May. This should reduce pressure to accelerate the pace of rate hikes – provided there are no surprises on the demand side (such as rental prices).

Czech National Bank Credibility

A really great thing about South Africa’s central bank is that its credibility remains intact – unlike (possibly) the Czech National Bank (CNB), which lost a bunch of outspoken hawks in the latest reshuffle, and where the market started to raise questions about politicians’ influence on the board’s decision-making process. The departing hawks “slammed the door” at today’s rate-setting meeting – delivering a “super-sized” (by Czech standards) 125bps hike that exceeded expectations. The currency, however, failed to rally, because today’s hike can mean an extended pause in a situation when inflation pressure continues to mount.  

EM Rate Hike Expectations

Now, going back to the two remaining “within target” EMs – it’s hard to see China tightening any time soon (it’s moving in the opposite direction due to growth concerns), but Indonesia is definitely on our watch-list. Indonesia’s central bank (BI) meets tomorrow, and the latest communications poured some cold water on the rate hike expectations. Governor Perry Warjiyo said there is currently no need to “rush into increasing interest rates” because there are no fundamental inflation pressures. Fair enough, especially given that the central bank made a pre-emptive move back in May by announcing additional increases in the reserve requirements for banks. So, it looks like there will be no surprises in Indonesia, but it’s going to be an interesting day in Mexico – bi-weekly inflation in the morning will be followed by the central bank’s rate-setting meeting (and a possibility of a larger +100bps hike!). Stay tuned!

Chart at a Glance: EM Inflation – Targets? What Targets?

Chart at a Glance: EM Inflation – Targets? What Targets?

Source: Bloomberg LP

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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