While top central banks such as the Federal Reserve, the ECB and the Bank of Japan may be sitting on their hands as inflation rises, many of their peers in the big developing economies aren’t taking any chances.
Colombia is second behind Brazil in terms of market pricing of future hikes, although protests, some poor data and the loss of two investment grade ratings in quick succession mean lift-off might not happen until September.
Chile is seen hoisting its 0.5% rates to 2% between now and the end of the year.
Despite this week’s global market squalls, a daily JPMorgan reading of financial pricing shows the 18 top emerging markets are expected to deliver the equivalent of 73 standard-sized, 25-basis-point interest rate hikes over the next 12 months, and just over 100 in the next two years.
So where are the biggest moves likely to be? How long could these hiking cycles last? And who are the outliers?
A survey of more than 100 economists by Brazil‘s Central Bank on Monday predicted its 4.25% benchmark rate will jump to 6.75% by year-end.
Most economists think another hike of at least 75 basis points on Aug. 4 is likely, but 12-month market pricing shows roughly 370 basis points worth of raises, which would leave them near 8% – that’s a long way from the 2% they were at as recently as March.
Brazil‘s real fell nearly 8% in the first quarter, among the weakest major currencies at the start of the year, but rebounded to be the top performer last quarter with a surge of more than 13%.
The sharp turnaround is due in part to Brazil’s central bank, now one of the emerging world’s most hawkish. At the turn of the year, its benchmark Selic rate was a record low 2% and the central bank’s rate-setting Copom committee had a policy of forward guidance to indicate rates would remain there.
With above-forecast inflation, Copom delivered its first rate hike in almost six years in March. It has not looked back, hiking by 75 bps at each of its next two meetings to 4.25% and even discussing a larger increase at its June meeting.
Mexico took economists by surprise last month when it delivered its first rate increase since 2018. Consensus is for it to lift them another 125 bps by year-end and 175 bps by this time next year, although UBS thinks forward rate agreements (FRA) are pricing in as much as 200 bps.
Though the Bank of Mexico hiked its key interest rate last month to stem surging inflation, analysts have increased their forecasts for Mexican inflation to around 6% for year end, double the central bank’s target.
Higher inflation “is consistent with a larger reopening of the economy, with relative prices still gradually normalizing following the sharp distortions caused by the pandemic,” said a report by local bank Banorte, which raised its inflation view for 2021 to 6.1% from 5.5%.
As Latin America‘s second largest economy recovers from the fallout of the coronavirus pandemic, annual consumer price inflation hit 5.88% in June, well above Banxico’s target rate of 3% plus or minus one percentage point.
Big beast China had been steadily tightening monetary policy until some wobbly economic data triggered a reversal this month in the shape of a cut to banks’ reserve requirements.
JPMorgan’s pricing charts still point to a fractional 14 bps worth of tightening over the next year, but that is half of what it was in early May.
Russia has already hiked three times this year. But with inflation running at its hottest in five years, the central bank is expected to whack interest rates up another 100 basis points on Friday to 6.50%.
Will it stop there? Bank of America and Oxford Economics think so, but JPMorgan reckons it will push on to 7% while Capital Economics has forecast 7.25% before year-end.
India’s headline consumer price inflation hanging around 6% ever since the crisis struck 18 months ago has been one of the puzzles of the pandemic.
It’s a big oil importer, so the sharp rise in crude prices over the last year will keep the pressure on. Economists don’t expect moves to normalise central bank policy – i.e. narrowing of the policy corridor by raising the reverse repo rate – any time soon. But it is being priced for early next year with the equivalent of seven 25-bps hikes then priced over two years.
New COVID waves will likely keep other Asian countries such as Indonesia, Malaysia, the Philippines and Thailand on hold.
President Tayyip Erdogan’s pressure means Turkey is the only heavyweight emerging market priced to make a significant-sized cut in the next 12 months. Yet the 100-basis-point drop priced into JPMorgan’s markets data would only take them down to 18% – still the highest rate of any sizable world economy.