India, Peru and Egypt show Acceleration in EM’s Easing Cycle

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Unexpectedly early interest rate cuts in India, Peru and Egypt on Thursday indicate that falling oil prices and gathering disinflationary pressures are accelerating a cycle of monetary easing in many emerging market economies, analysts said on Friday.

The easing in key EM economies – added to expectations that several more countries will also cut rates – stands in stark contrast to a recent market consensus that 2015 would herald upward pressure on EM rates as the US Federal Reserve espoused a tighter policy, analysts said.

“This (easing trend in EM) is quite unusual ahead of when the Fed is set to raise rates this year,” said Andre de Silva, global head of EM rates research at HSBC in Hong Kong.

Overall, de Sliva added, the countries more likely to cut rates are those experiencing disinflationary pressures while remaining relatively insulated against the prospect of Fed tightening by dint of strengthening current account and external financing positions. Of course, this leaves several important EM countries – such as Russia, Brazil, South Africa, Nigeria and Turkey – in which easing is less likely.

Neil Shearing, chief emerging markets economist at Capital Economics, concurs: “The bias in EM is clearly going to be at an aggregate level towards (monetary) easing. However, there are of course exceptions such as Russia, Brazil and Turkey…which show that different parts of EM are being affected in different ways.”

An acceleration of the EM easing cycle
The surprise cuts by the central banks of India (25 basis points), Peru (25 basis points) and Egypt (50 basis points) each overturned a robust market consensus. In the case of Peru, for example, all 18 forecasters polled by Bloomberg predicted no change in monetary policy at the central bank’s meeting on Thursday.

In retrospect, though, analysts perceive an ordering logic to explain the decisions. Peru, which saw economic growth slow in November to 1.8 per cent year on year from 2.1 per cent in October, was motivated by a desire to boost domestic demand, analysts said. Raghuram Rajan, governor of the Reserve Bank of India (RBI), cited a sharp fall in inflation in India, which relies heavily on imported energy, as the main reason for the cut. Egypt, analysts said, was probably motivated by a sense that inflation may drop back below 10 per cent in coming months, giving it license to boost demand.

Several EM countries are experiencing similar conditions, prompting analysts to see a wide set of variations in the timing and extent of potential monetary policy adjustments. The countries below give a cross-section of those in which a rate cut is seen as likely or possible.

China. Zhu Haibin, China chief economist at JPMorgan sees further monetary easing in the first half of this year against a backdrop of growth concerns and disinflationary pressures. “We expect one more rate cut, likely in the first quarter, and two required reserve ratio (RRR) cuts,” he said. A cut in the RRR has the impact of releasing liquidity which is held by banks on deposit at the central bank into the economy, thus potentially boosting activity.

De Silva also sees a rate cut in China materialising “soon”.

However, Shen Jianguang at Mizuho Securities in Hong Kong sees a likelihood that Beijing will prefer to use targeted monetary easing measures, such as the medium-term lending facility (MLF), rather than cut interest rates and the RRR in the first instance.

India. Pranjul Bhandhari, chief India economist at HSBC, said he expects the next rate cut following the February budget. “Going ahead, we think the onus is on the government to revive capex and growth in a fiscally disciplined way, so as to allow the RBI space for cutting rates,” Bhandhari wrote in a report.

Dariusz Kowalczyk, senior economist at Credit Agricole said he expects the RBI to cut rates by another 25 basis points in April.

In Thailand and South Korea, a rate cut is likely as these two countries have been beneficiaries of the lower price of oil, according to HSBC’s de Silva.

Indonesia. Although Indonesia is currently out of step with the regional disinflation cycle because of its decision to hike fuel prices in November, Daniel Wilson, economist at ANZ Research, wrote in a report that “the Bank of Indonesia BI could well be in a position to cut rates in the second half of the year.”

However, Gareth Leather, Asia Economist at Capital Economics, wrote that he expects Indonesian interest rates to remain on hold for the whole of this year.

Poland. Analysts at Nomura wrote that Poland’s interest rates are likely to remain unchanged until a slow hiking cycle start in November. However, a fault line exists between doves and hawks among financial decision makers, with the doves backing further cuts in rates due to worries over disinflation and the hawks appearing less concerned over the disinflationary trend.

Source: The Financial Times

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