EM Monetary Policy Decouples From the Fed (For Now)

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EM monetary policy has largely decoupled from the Fed, at least for now.  Some EM central banks have followed the Fed in lockstep with 25 bp hikes, but these were due to their currency pegs.  Most countries that do not have a peg in place are finding that they do not need to match the Fed, and are either cutting rates or keeping steady rates. 

WHO’S EASING?

Since February 2015, Russia has cut rates 800 bp to 9.0% currently.  The last cut was 25 bp last week, and Governor Nabiullina said that easing was likely to continue in H2 while warning that a pause may be seen.  Next policy meeting is July 28 and no change is expected.  Bloomberg consensus sees year-end rate of 8.0-8.25%.

Since October, Brazil has cut rates 400 bp to 10.25% currently.  The last cut was 100 bp in May.  Next policy meeting is July 26 and a 75 bp cut to 9.5% is expected.  Bloomberg consensus sees year-end rate of 8.5%.

Since December, Colombia has cut rates 150 bp to 6.25% currently.  The last cut was 25 bp in May.  Next policy meeting is June 30 and a 50 bp cut to 5.75% is expected.  Bloomberg consensus sees year-end rate of 5.5%.

Peru just started the easing cycle with a 25 bp cut to 4.0% in May.  Next policy meeting is July 13 and a 25 bp cut to 3.75% is expected.  Bloomberg consensus sees year-end rate of 3.75%.

WHO’S TIGHTENING?

The Reserve Bank of India unexpectedly hike its reverse repo rate 25 bp to 6.0% in April.  Since then, it remained on hold in June as price pressures fell sharply.  We believe the bank is still in tightening mode but will pause for the near-term to see if inflation picks up again.  Next policy meeting is August 2, no change is expected then.

The Czech National Bank removed the floor for EUR/CZK in April.  The next move in normalizing policy is a rate hike from the current 0.05%, but the timing is uncertain and dependent on how the koruna trades.  Next policy meeting is June 29 and no change is expected.  Central bank officials see the first hike in Q4, as does Bloomberg consensus.

Since November 2015, Egypt has hiked rates 800 bp to 16.75%.  The last hike was 200 bp in May.  Inflation spiked after the EGP float in November 2016, but appears to be topping out.  If disinflation continues, then the tightening cycle may have ended.  Next policy meeting is July 6 and no change is expected.

Since November, Turkey hiked the benchmark rate 50 bp to 8.0%.  However, the bank now uses the Late Liquidity Window as its main policy tool, and has hiked that rate 250 bp since November.  The last hike was 50 bp in April.  Inflation spiked but appears to be topping out.  If disinflation continues, then the tightening cycle may have ended.  Next policy meeting is July 27 and no change is expected.

Since the 7-day repo rate became the policy rate in January, Argentina hiked rates 150 bp in April to 26.25% currently.  If disinflation continues, the tightening cycle has likely ended.  Next policy meeting is June 28 and no change is expected.

Since December 2015, Mexico has hiked rates 375 bp to 6.75% currently.  The last hike was 25 bp in May.  With inflation continuing to rise, it is expected to hike rates another 25 bp to 7.0% at its June 22 meeting.  After that, Bloomberg consensus sees no more hikes in 2017 and steady rates through much of 2018.

WHO’S ON HOLD?

Since it last cut 25 bp in October 2015, China has kept the 1-year lending rate on hold at 4.35%.  However, it has snugged some money market rates higher since the Fed tightened, leading many analysts to ask for greater clarity as to which rate represents policy best.  Bloomberg consensus sees steady rates through year-end and through most of 2018.

Since it last cut 25 bp in October 2016, Indonesia has kept rates on hold at 4.75%.  It has signaled that the next move is likely to be a hike.  Next policy meeting is July 20 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start in Q1 2018.

Since it last cut 25 bp in June 2016, Korea has kept rates on hold at 1.25%.  Next policy meeting is July 13 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start by mid-2018.

Since it last cut 25 bp in July 2016, Malaysia has kept rates on hold at 3.0%.  Next policy meeting is July 13 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start by mid-2018.

Since it last cut 100 bp in May 2016 when it switched policy rates, the Philippines has kept rates on hold at 3.0%.  Next policy meeting is June 22 and no change is expected.  Bloomberg consensus sees potential tightening to start in Q3 2017.

Since it last eased by adjusting the S$NEER trading band in April 2016, Singapore has kept policy on hold.  Forward guidance from MAS suggests the first tightening won’t be seen until April 2018 at the earliest.  Next policy meeting is in October and no change is expected.

Since it last cut 12.5 bp in June 2016, Taiwan has kept rates on hold at 1.375%.  Next policy meeting is June 22 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start by mid-2018.

Since it last cut 25 bp in April 2015, Thailand has kept rates on hold at 1.5%.  Next policy meeting is July 5 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start by mid-2018.

Since it last cut 15 bp in February 2015, Israel has kept rates on hold at 0.10%.  Next policy meeting is July 10 and no change is expected.  Bloomberg consensus sees steady rates through year-end with tightening to start in Q1 2018.

Since it last cut 50 bp in March 2015, Poland has kept rates on hold at 1.50%.  Forward guidance from bank officials sees the first hike in 2018 but some have gone so far as to say it may not happen until 2019.  Next policy meeting is July 5 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start by mid-2018.

Since it last hiked 25 bp in March 2016, South Africa has kept rates on hold at 7.0%.  Forward guidance from bank officials suggests the tightening cycle has ended, but also downplays near-term easing.  Next policy meeting is July 20 and no change is expected.  Bloomberg consensus sees steady rates through Q3 with potential easing to start in Q4.

Since January, Chile has cut rates 100 bp to 2.5% currently.  It signaled that the easing cycle was over after the last 25 bp cut in May.  Next policy meeting is July 13 and no change is expected.  Bloomberg consensus sees steady rates through year-end with potential tightening to start in H1 2018.  

PEGGED CURRENCIES

Under this special circumstance, these central banks do not run an independent monetary policy and are obligated to match the Fed’s hikes in lockstep.  This list includes (but is not limited to) Hong Kong, Saudi Arabia, UAE, Qatar, and Bahrain.  Of note, Kuwait refrained from following the Fed this time and kept rates steady due to concerns about growth.

CONCLUSIONS

For now, EM central banks have the freedom to set monetary policy for domestic conditions.  That is largely because the pace of Fed tightening has not been disruptive for EM yet.  If conditions change and EM FX comes under greater pressure, then we believe many EM central banks will change tack and hike rates to help support their currencies.