19 March 2021
Chief Investment Office GWM
Tilmann Kolb, Analyst email@example.com +41-44-234 81 98
Not one, not two, but three emerging market central banks surprised rate hike expectations to the upside this week. Policy rates were set higher in Brazil, Turkey, and Russia, supporting our positive views on the Turkish lira and the Russian ruble.
The Brazilian central bank (BCB) started off on 17 March by delivering a 75 basis point hike, lifting the policy rate to 2.75%. Importantly, it also signaled an intention to hike again by 75bps at its next meeting on 5 May, assuming the inflation and risk outlook doesn’t change significantly in the meantime. This should help anchor inflation expectations around 3.5% for 2022, notwithstanding the transitory upward pressure on inflation. The Brazilian real rejoiced, but it is still likely not enough for sustained strength. The BCB will have to maintain its hawkish stance in the face of the ongoing pandemic situation in Brazil and the politics around former President Lula da Silva’s acquittal, both of which will affect election, fiscal, and reform dynamics. An easing of worries around the fiscal outlook and a better outlook on the pandemic front would be preconditions for lasting BRL strength, in our view.
On 18 March, the Turkish central bank (CBRT) hiked rates by 200bps to 19%, against a consensus expectation of 100bps. Inflation has consistently surprised to the upside over the past few months. The lira had come under pressure from mid- February to mid-March due to renewed market focus on the sustainability of tight monetary policy conditions in Turkey and the precipitous rise in global yields. With the CBRT's latest hike, we think the bank has proved its inflation fighting credentials again, and demonstrated to the market that its pledge to stand ready to tighten monetary policy wasn’t just lip service. It also demonstrates domestic dynamics do matter for emerging markets, and long-term, sensible policies are rewarded. Turkey’s macro policy making has significantly improved, in our view, since the changes at the top of the central bank and finance ministry in November. The decision to hike the policy rate and the emphasis on credit growth in the CBRT’s accompanying statement suggest that monetary policy is on the right path. We expect the current TRY-favorable monetary policy stance to persist for now. This is an important driver and basis for our recommendation to buy the lira against the US dollar. Additional spot gains should combine with the high interest rate carry to deliver total returns of around 8% until mid-year.
The Russian central bank decided to act against rising inflation and elevated inflation expectations by hiking its policy rate by 25bps to 4.50% on 19 March. With risks more on the pro-inflationary side, in its view, further hikes are possible. The central bank thus again showcased its prudent approach to monetary policy, one of the pillars for the ruble. The currency has remained unfazed by higher longer-term US rates and oil price gyrations, but came under pressure earlier this week as geopolitical news flow again turned more negative. While severe adverse measures against Russia by European nations and the US would undermine our positive RUB view, we think the positive global growth outlook and high oil prices should ultimately outweigh international political concerns over time, enabling the ruble to make up more of the losses it has sustained since the start of the pandemic.
We preview central bank decisions in Mexico, South Africa and the Czech Republic in "The Week Ahead," published on 18 March.
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