- In Brazil, given that inflation has subsided and in Mexico, Defend warns about a framework of a closing output gap and inflation
- In China, the monetary policy must remain prudent to prevent a return to the old model of allocation and growth
- In India, the central bank is being more dovish
- In Europe, some interest rate cuts could arrive in countries like Hungary
In the last Pioneer Investments’ EM Update about Central Banks & Monetary Policies, Head of Global Asset Allocation Research at Pioneer Investments, Monica Defend, shares her view on Emerging Markets monetary policies.
In Asia, and regarding to China, she considers that the implementation of fiscal reform is proceeding as ten local governments will be allowed to issue bonds with full responsibility of repayment. “Even though the economic slowdown would suggest a stronger monetary easing, in the ongoing process of liberating interest rates and increasing efficiency in credit allocation, monetary policy must remain prudent to prevent a return to the old model of allocation and growth. The latest reserve requirement ratio cut for some qualified banks supports this attitude of the People’s Bank of China”.
In India, in early June, the Reserve Bank of India (RBI) kept policy rates on hold at 8% and eased the access to liquidity (via the statutory liquidity ratio reduction and a special term repo facility). “In our opinion, the RBI’s tone has been more dovish than in April, with the aim of supporting the next actions of the new government. The well-known inflation risks to the upside are broadly balanced by the possibility of stronger government action on food”.
In Europe, some interest rate cuts could arrive in countries like Hungary. “It is clear that a certain degree of “imported” (from Eurozone) weak price dynamics, plus stable commodity prices are favoring this weak trend. The distance between the central bank’s inflation rate forecast (0.7% in Q2 2014, rising to 3% to the end of 2015) and actual data prompted a 10 basis point (bp) rate cut on May 27. The central bank also stated that “…however, achieving price stability in the medium term, points in the direction of monetary easing” and is an important piece of information for making monetary policy choices. If forecasted inflation remains similar, it is possible that a further cut will arrive soon”.
Similar in Poland: “In its statement after the last meeting (June 3), the National Bank of Poland acknowledged that April inflation is not only widely below the medium-term target (2.5%) but also below the forecasts formulated in March. The bank maintained its forward guidance of unchanged rates until at least Q3. But as in Hungary, the central bank suggested that the next inflation report round of forecasts will be key to determining the possible evolution of rates”.
Defend doesn’t see more hikes in Brazil’s rates. As the market expectated, the central bank left the benchmark Selic interest rate unchanged on May 28 at 11%, pausing a hiking cycle initiated in April 2013. The announcement reinforced the idea that the central bank’s monetary policy committee members (COPOM) are comfortable with the current rate levels, given that inflation has subsided. “Assessing the evolution of the macroeconomic scenario and the perspectives for inflation, the COPOM decided, unanimously, at this moment, to keep the Selic rate at 11.00%.” The growth slowdown is increasingly worrying economic authorities and, it is now likely that Brazil’s central bank reaction function will give greater weight to growth dynamics.
In Mexico, the police could be too loose. “The Bank of Mexico (Banxico) cut the overnight rate from 3.5% to 3% on June 6, surprising us and the market. In its statement, Banxico mentioned that this one-off rate cut was motivated by the notably weaker-than-expected economic performance in the first quarter and by the downside risks to growth that remain on the horizon. The current central bank outlook is for moderating inflation and annual growth, which implies considerable acceleration in the coming quarters. We believe that the current monetary policy stance might be too loose in a framework of a closing output gap and inflation, which is well-behaved yet above the target (especially considering the delay at which monetary policy works)”.