EM Policy Rates – Asia Catching Up Fast
14 July 2022
Read Time 2 MIN
Aggressive Frontloading of Hikes in EM Asia
Sometimes it is good to be a latecomer – one can learn from others’ mistakes. It looks like central banks in EM Asia noticed that a proactive response (frontloading of rate hikes) to rising inflation pressures (like in Brazil) is much better than policy procrastination (like in Poland). This definitely explains a wave of inter-meeting tightening in the region. India started the trend with a 40bps “emergency” rate hike back in May. The Philippines surprised yesterday with a sizable 75bps inter-meeting move. And Singapore’s monetary authority followed up with the second off-cycle upward re-centering of its policy band. Asia’s role in emerging markets (EM) overall tightening is getting more prominent these days (see chart below), as some trailblazers like Brazil are gradually winding down their cycles.
Market Expectation of Larger Fed Hikes
Some commentators are wondering whether a greater sense of urgency in EM Asia is related to the market expectation of larger rate hikes in the U.S., following a big upside inflation surprise in June. The Fed Funds Futures now almost fully “digested” a 100bps hike in July, followed by 75bps more in September. One thing that is unchanged is that the U.S. Federal Reserve (Fed) is expected to finish its tightening cycle in December and start cutting rates in 2023 – presumably due to a growing risk of recession. Timely frontloading/liftoff in EM Asia leaves room for a slower pace of rate hikes later on, but it is hard to see tightening cycles in the region be over in 5-6 months (in sync with the Fed).
Some EM Hikes Underwhelm
Today’s “shock and awe” policy move in the Philippines underscores once again that not all rate hikes of the same magnitude are created equal. The central bank of Chile also raised its policy rate by 75bps yesterday, but the market reaction was more like “it could have been worse at +50bps”. It was definitely not enough to stabilize the currency, which opened about 250bps weaker against the U.S. dollar this morning. And the central bank better deliver on its guidance to continue tightening in the coming months. The next important policy milestones in EM are rate-setting meetings in the Czech Republic and Thailand. The Czech National Bank’s departing hawks delivered a super-sized “goodbye” hike in June, and the local swap curve prices in no additional tightening in the next 3 months. Thailand’s central bank meets in August about 1 week after the inflation release – what are the chances of a “mega” 75bps liftoff if headline inflation moves above 8% year-on-year? Stay tuned!
Chart at a Glance: EM Asia - Frontloading Hikes To Avoid Policy Mistakes
Source: VanEck Research; Bloomberg LP
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