EM Monetary Policy Outlook – EMEA

Mkts Blog_Monetary Policy-EMEA

The “surprise” move by the Monetary Authority of Singapore today really shouldn’t come as much of a surprise. Like the rest of the region, Singapore is struggling with deflation risks and sluggish growth. As such, easing policy makes perfect sense and follows rate cuts earlier this year by India, Indonesia, and Taiwan. Indeed, outside of Latin America, EM central banks for the most part are in dovish/easing mode. Coupled with expected Fed tightening, this divergence story should put some pressure on EM FX. Indeed, we do not think stronger currencies are desired by most in EM right now, though we of course downplay the “currency wars” meme that the press likes to push.

Over the next several days, we will be publishing our monetary policy outlooks for the different EM regions. Today, we start with EMEA. With the exception of South Africa, we believe most of the central banks in the region are in dovish/easing mode. This is due in large part to persistent deflation risks, while Russia and Turkey are keener to boost growth.

Czech Republic – At the March meeting, the Czech National Bank’s forward guidance for maintaining current policies was pushed out “closer” to mid-2017 from H1 2017 previously. Central bankers have continued to discuss the possibility of negative rates, but we think it would take significant deterioration of the economic outlook for this to happen. For now, we see the policy rate remaining at 0.05% and the floor for EUR/CZK remaining “near” 27.0 until at least mid-2017. CPI rose a meager 0.3% y/y in March, well below the 1-3% target range. Next meeting is May 5, no action seen then.

Hungary – After pausing at 1.35% for seven straight months, the central bank restarted its easing cycle with a 15 bp cut to 1.20% in March. This was on top of other unconventional measures that were taken during the period of no rate cuts. Deflation has returned, with CPI at -0.2% y/y in February, well below the 2-4% target range. Further easing is seen in the coming months, starting with another 15 bp cut at the next meeting April 26. Other unconventional measures are possible too in the months ahead.

Israel – Bank of Israel has been on hold at 0.10% since its last 15 bp cut in February 2015. Yet deflation risks persist, with CPI at -0.2% y/y in February and well below the 1-3% target range. For now, the preferred method of stimulating the economy is a weaker shekel, as the central bank has been intervening a bit more aggressively. Despite hearing some talk of unconventional measures, we think it would take a significant downturn in the economy for the bank to go down that road. Next meeting is April 21, no action seen then.

Poland – National Bank of Poland has been on hold at 1.50% since its last 50 bp cut in March 2015. Almost the entire MPC has been replaced this year by the incoming Law and Justice party. It seems the bank will remain on hold near-term but the last piece of the puzzle may fall into place in June, when central bank President Belka will also be replaced. With a new head, we think the bank will likely ease in H2. Deflation risks persist with CPI at -0.9% y/y in March and well below the 1.5-3.5% target range. Next meeting is May 6, no action seen then.

Russia – Central Bank of Russia has been on hold at 11.0% since its last 50 bp cut in July 2015. Inflation fell to 7.3% y/y in March, the lowest since April 2014 but still above the 4% target. Governor Nabiullina said an improving inflation outlook will allow the bank to undertake steeper monetary easing without putting financial stability at risk. Still, she cautioned that one-off factors were largely responsible for the recent slowdown of inflation. The next policy meeting April 29 may be too soon to start the easing cycle.

South Africa – The South African Reserve Bank is in the midst of a tightening cycle that it re-started in July 2015. The last move was a 25 bp hike to 7.0% in March. With inflation running at 7% y/y in February, the real rate remains at zero. The SARB sees inflation running above the 3-6% target range this year before peaking around 7.3% in Q4. Further tightening seems likely, with another 25 bp hike seen at the next policy meeting May 19. The rand may be the deciding factor then, as recent firmness should help limit price pressures.

Turkey – The Central Bank of Turkey surprised the markets last month by cutting the top of the rates corridor by 25 bp to 10.50%. The bottom of the corridor and the benchmark rate were kept unchanged at 7.25% and 7.50%, respectively. Inflation fell to 7.5% y/y in March, the lowest since but still above the 3-7% target range. Governor Basci’s term ends April 19, and his replacement will likely come under pressure from the government to ease more aggressively. The rates corridor will likely be modified again at the April 20 meeting, with markets looking for a 50 bp cut in the top to 10.0%. We think an outright cut in the benchmark rate will be seen in Q2.