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
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.