A forward and strong additional monetary tightening. ‘
By Wolf Richter for WOLFSTRAAT.
In a shock and awe move, the Central Bank of Turkey today increased its policy rate, the one-week repo rate, by two full percentage points, from 17% to 19%. Economists expected a rate increase of half the magnitude.
The Monetary Policy Committee said in its press release that, taking into account inflation developments – the inflation rate jumped to 15.6% in February – it “decided to introduce a pre-tax and strong additional monetary tightening.”
And further increases are on the way: ‘The tight monetary policy position will be decisively maintained, given the forecast target for the end of 2021, for a long period until strong indicators point to a permanent decline in inflation and price stability.’
The battered lira – it has fallen 60% against the US dollar over the past five years, even after rising 15% since the low in November – has jumped 1.5% against the dollar today.
Turkey’s government and corporate sector have borrowed heavily in foreign currency, mainly in euros and dollars. That debt becomes difficult to service with a dive lira. This has shaken Turkey to the brink of a financial crisis over the past three years.
Other developing economies now have a similar problem: inflation is rising, their currencies need to be pushed up, and debt levels have exploded during the pandemic of already high levels.
Brazil’s shock and awe increase yesterday.
The Central Bank of Brazil put down the hammer yesterday with a rate hike of 0.75 percentage points, bringing the Selic rate to 2.75%. A rate hike was expected, but not a Volker-type surprise monster.
And it is said that another biggie of “the same size” will probably come at the next meeting.
The primary topic in the statement released by the interest rate committee (Copom) was inflation, and the rate hike was aimed at combating it. Inflation rose to 5.2% in February from 4.6% in January.
“The continued rise in commodity prices, measured in local currency, is affecting current inflation and has caused further increases in inflation forecasts for the coming months, mainly due to its impact on fuel prices,” he said.
“The different measures of underlying inflation are above levels that are compatible with the inflation target,” he said.
And he adds that “the committee maintains the diagnosis that the current shocks are temporary.” This is what the Fed has said it will say if inflation figures become ugly over the next few months.
The Bank of Brazil is tightening monetary policy – as part of a “partial normalization process”, as the stimulus is no longer needed, with GDP “growing strongly” at the end of 2020, with inflation expectations “above target” the relevant monetary policy horizon, “and with inflation projections” close to the upper limit of the target for 2021. “
Central Bank of Russia meets Friday: Shock and awe for economists expecting no rate hike?
On March 19, the Central Bank of Russia – with an inflation rate rising to 5.7% in February from 5.2% in January, and from 3.7% six months ago – is expected by 27 of 28 economists to polled by Reuters, maintains policy rate of 4.25%, but communicates to markets that it will soon raise rates.
Do these economists underestimate the will of the Bank of Russia to fight inflation, as they underestimated the will of the central banks of Turkey and Brazil? Are they for another shock-and-awe treatment?
The inflation target of the Central Bank of Russia is 4%, and the target was reached in October and now there is the exceedance of 5.7%. When the inflation data were reported on March 11, the Central Bank of Russia said in a statement: “If we move forward, the monetary policy followed will keep annual inflation close to 4%.”
In this statement, there was nothing to be satisfied with the surplus and to allow the surplus to continue to surplus, as the Fed would say.
At its last meeting on 12 February, the Bank of Russia kept its policy rate at a record low of 4.25%, but the statement focused on inflation. “Prices continued to grow at an increased rate,” he said. Amid demands that ‘recover faster and more sustainably than expected’, supply constraints continued ‘to push upwards’. And inflation expectations by households and businesses were ‘raised’.
Then said that rate hikes are imminent: “If the situation develops in line with the baseline forecast, the Bank of Russia will determine the timeline and pace of a return to neutral monetary policy …”
So what is ‘neutral monetary policy?’ According to the deputy governor of the Central Bank, Alexei Zabotkin, who was quoted by Reuters last week, it would be 5 to 6%, and he was sooner rather than later, he said.
Following this statement, economists expect the Bank of Russia to lay additional foundations at tomorrow’s meeting, above the ones it has already laid, for an interest rate hike during the April or May meeting. So let’s see if the Bank of Russia meets expectations, or channels Turkey and Brazil and hits the economists with a surprising rate hike.
All eyes are on Nigeria.
Food price inflation is a particular problem because poorer populations spend excessive amounts of their income on food, and food price inflation can be devastating to them.
In Nigeria, the inflation rate rose to 17.3% in February from 16.5% in January and from 13.7% six months ago. Despite the rise in inflation, the Central Bank of Nigeria maintained its policy rate at 11.5% at its January meeting. Nigeria’s economy is currently in stagflation, and rising rates could hit the economy further, but it could get ugly to accelerate inflation.
India’s market prices are rising the fastest in Asia. RBI says no.
India’s inflation rate rose to 5.0% in February from 4.1% in January, with food inflation more than doubling to 3.9%.
At the January meeting, the Reserve Bank of India maintained its standard repo rate at 4%. Shaktikanta Das, governor of the RBI, sticks to Fed Chairman Powell’s line to keep monetary policy accommodating for as long as necessary to support the recovery. And for now, inflation remains within the RBI’s wide target range of 2% to 6%.
But markets are starting to price rate hikes. The yield on three-month government bonds has risen by about a quarter of a percentage point since the beginning of January and stands at 3.32% today. Given the time frame of three months from the expiration date, the rate responds to the expected movements within the three months.
The five-year interest rate swaps in India rose 63 basis points in February, according to Bloomberg, the largest monthly move since the tapered tantrum in 2013. On Wednesday, the five-year exchange rate closed at 5.38%, up from 4.5% early in the year. January. According to Naveen Singh, head of fixed income trading at ICICI Securities Primary Dealership in Mumbai, quoted by Bloomberg, these exchange rate price increases for the next year amount to about 1 percentage point, which is the fastest sharpening of any country in Asia.
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