RATE HIKES ON THE CARDS IN EMERG­ING MAR­KETS

▶ A surg­ing dol­lar and the high­est 10-year US Trea­sury yields since 2011 are fu­el­ing con­cerns of in­fla­tion

The National - News - - BUSINESS - Bloomberg

Emerg­ing-mar­ket cen­tral banks are set to go on the de­fen­sive.

A surg­ing dol­lar and the high­est 10-year US Trea­sury yields since 2011 are fu­el­ing bets that pol­i­cy­mak­ers in key de­vel­op­ing na­tions from In­dia to Mex­ico will raise in­ter­est rates faster than econ­o­mists pre­vi­ously an­tic­i­pated.

The turn­around is led by con­cern that a fail­ure to tighten mone­tary pol­icy risks the pos­si­bil­ity in­vestors will zero in on swollen cur­rent-ac­count deficits, spurring cur­rency sell-offs and send­ing in­fla­tion soar­ing. The fall­out is most ev­i­dent in cri­sis-hit Ar­gentina, which jacked up its bench­mark bor­row­ing rate to 40 per cent, but is also pro­nounced in Asia, where an­a­lysts are now pre­dict­ing rate hikes in Indonesia, In­dia and the Philip­pines.

“When the Fed’s on the move, cen­tral banks in emerg­ing mar­kets try to play catch-up,” said Fred­eric Neu­mann, the co-head of Asian eco­nom­ics re­search at HSBC Hold­ings in Hong Kong.

HSBC now says the Re­serve Bank of In­dia will hike rates twice this year af­ter pre­vi­ously ex­pect­ing no change, and fore­casts the Bank of Indonesia will tighten, scrap­ping an ear­lier prediction it would stay on hold. For the Philip­pines, HSBC main­tains a bias to­ward rais­ing even af­ter Bangko Sen­tral ng Pilip­inas lifted rates this month for the first time since 2014.

Some coun­tries that were cut­ting rates are poised to hold off on fur­ther re­duc­tions. That is ex­actly what hap­pened in Brazil, where the cen­tral bank sur­pris­ingly kept its key rate un­changed on Wed­nes­day af­ter twelve con­sec­u­tive cuts, reneg­ing on its own guid­ance. Pol­i­cy­mak­ers had sig­naled an ad­di­tional rate reduction in the pre­vi­ous meet­ing, but the emerg­ing mar­ket rout forced a shift in the pol­icy direc­tion.

In the past two weeks, econ­o­mists at JPMor­gan Chase & Co. boosted their rate fore­casts for Indonesia and the Philip­pines by a quar­ter per­cent­age point. Stan­dard Char­tered Plc ex­pects In­dia to raise the repo rate in two moves of 25 ba­sis points each at the June and Au­gust meet­ings. No­mura Hold­ings now sees 50 ba­sis points of hikes in In­dia and Indonesia and says oth­ers may join the list of coun­tries rais­ing rates, in­clud­ing Turkey, Chile and Ro­ma­nia.

Turkey’s cen­tral bank said on Wed­nes­day that it was mon­i­tor­ing mar­kets and would take the nec­es­sary steps to re­store con­fi­dence af­ter the lira tum­bled to a record low.

Har­vard pro­fes­sor and economist Car­men Rein­hart says de­vel­op­ing na­tions are worse off than dur­ing their two most re­cent mo­ments of weak­ness, the 2008 global fi­nan­cial cri­sis and 2013 ta­per tantrum. She points to mount­ing debt loads, weak­en­ing terms of trade, rising global in­ter­est rates and stalling growth as rea­sons for con­cern.

“Be­cause of rising bal­ance-of-pay­ments risks, the pres­sure is build­ing for sev­eral cen­tral banks to hike rates sooner than we thought, even though, in some cases, in­fla­tion is be­nign,” No­mura an­a­lysts Andrew Cates and Rob Sub­bara­man wrote in a re­cent re­port.

Na­tions with cur­rent ac­count sur­pluses are in a bet­ter po­si­tion to with­stand the im­pact

of Fed in­ter­est-rate hikes than those with deficits. In­fla­tion also re­mains sub­dued around most of the world, tak­ing pres­sure off au­thor­i­ties.

Thai­land’s cen­tral bank on Wed­nes­day left its bench­mark in­ter­est rate near a record low, and said it does not feel pres­sure to join the global wave of tight­en­ing. China is also in a com­fort­able po­si­tion, helped by con­trols on the flow of money into and out the coun­try.

Else­where, though, the pres­sure re­mains for tighter pol­icy. The Mex­i­can cen­tral bank may hike rates, mo­ti­vated by peso weak­ness and con­cerns about in­fla­tion, ac­cord­ing to Mike Mo­ran, the chief economist for the Amer­i­cas at Stan­dard Char­tered Bank. Most an­a­lysts sur­veyed by Bloomberg ex­pect the bank to leave the rate at 7.5 per­cent.

In what is prob­a­bly the most em­blem­atic case of pol­i­cy­mak­ers re­spond­ing to the dol­lar rally and higher Trea­sury yields, Ar­gentina’s cen­tral bank used an in­ter­est rate shock to try to calm mar­kets af­ter its cur­rency slumped to a record low. Of­fi­cials raised bor­row­ing costs by 12.7 per­cent­age points in just over a week to 40 per cent, the high­est in the world.

The pres­sures are broad based.

Sri Lanka’s cen­tral bank said yes­ter­day it is open to us­ing its foreign re­serves to sup­port the na­tion’s cur­rency.

Fitch Rat­ings says it’s in­evitable that emerg­ing mar­kets will have to em­bark on tighter mone­tary poli­cies over the next years.

A money ex­change in Buenos Aires. Ar­gentina’s cen­tral bank used an in­ter­est rate shock to try to calm mar­kets

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