“A strong and anticipated additional monetary tightening.”
By Wolf Richter for WOLF STREET.
In a movement of shock and awe, the Central Bank of Turkey today raised its basic interest rate, the week-long repurchase rate, by two percentage points, from 17% to 19%. Economists had expected rates to increase by half that magnitude.
The Monetary Policy Committee said in its press release that, considering the evolution of inflation – the inflation rate jumped to 15.6% in February – it “decided to implement a strong and anticipated additional monetary tightening”.
And further increases are on the way: “The restrictive stance of monetary policy will be maintained in a decisive manner, taking into account the target projected for the end of 2021, for a prolonged period, until strong indicators point to a permanent fall in inflation and stability of prices.
The abused lira – in the last five years, has fallen 60% against the US dollar, even after the 15% increase since the November low – jumped 1.5% today against the dollar.
Turkey’s government and corporate sector borrowed heavily in foreign currency, mainly in euros and dollars. This debt is difficult to pay with a lira in free fall. This has left Turkey on the verge of a financial crisis for the past three years.
Other developing economies now face a similar dilemma: inflation is skyrocketing, their currencies need to be sustained and debt levels have exploded during the already high pandemic.
Increased shock and awe in Brazil yesterday.
The Central Bank of Brazil hit the hammer with the rate hike of 0.75 percentage points yesterday, taking the Selic rate to 2.75%. A rate hike was expected, but not a surprise Volker-type monster.
And he said that another important one of the “same magnitude” would probably come “at the next meeting”.
The main theme of the rate-fixing committee’s (Copom) communiqué was inflation, and the increase was aimed at fighting it. Inflation rose from 4.6% in January to 5.2% in February.
“The continued rise in commodity prices, measured in local currency, is affecting current inflation and has triggered further increases in inflation projections for the coming months, especially through its effects on fuel prices,” he said.
“The various measures of underlying inflation are at levels above the range compatible with meeting the inflation target,” he said.
And he added that “the Committee maintains the diagnosis that the current shocks are temporary”. Which is what the Fed said it will say when inflation figures get ugly in the coming months.
Banco do Brasil is tightening monetary policy – entering into “a process of partial normalization”, as it said – because the stimulus is no longer necessary, with GDP “growing strongly at the margin” at the end of 2020, with inflation expectations “ above target in the relevant horizon for monetary policy ”, and with inflation projections“ close to the upper limit of the target for 2021 ”.
Central Bank of Russia meets on Friday: shock and awe for economists who do not expect rate hikes?
On March 19, the Central Bank of Russia – facing an inflation rate that skyrocketed to 5.7% in February from 5.2% in January, and from 3.7% six months ago – is expected by 27 of the 28 economists heard by Reuters to maintain its basic interest rate of 4.25%, but communicate to the markets that it will raise rates soon.
Are these economists underestimating the Bank of Russia’s willingness to fight inflation, as they underestimated the will of the central banks in Turkey and Brazil? Will they receive another shock and awe treatment?
The Central Bank of Russia’s inflation target is 4%, and that target was reached in October and is now exceeding 5.7%. When the inflation data was released on March 11, the Central Bank of Russia said in a statement: “Moving forward, the monetary policy pursued will keep annual inflation close to 4%”.
In that statement, there was nothing about being happy with the overshoot and allowing the overshoot to increase further, as the Fed might say.
At its last meeting on February 12, the Bank of Russia kept its interest rate at a record 4.25%, but the statement focused on inflation. “Prices continued to grow at a high pace,” he said. Amid demand that “is recovering faster and more sustainable than expected”, supply restrictions continued “to put upward pressure on prices”. And inflation expectations on the part of households and companies were “high”.
Then he said that rate hikes are on the horizon: “If the situation evolves according to 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?” That would be 5% to 6%, according to Central Bank deputy governor Alexei Zabotkin, quoted by Reuters last week, and that was possible sooner or later, he said.
After that statement, economists now expect the Bank of Russia to establish additional bases at tomorrow’s meeting, in addition to the already established bases, for a rate hike at the April or May meeting. So let’s see if the Bank of Russia follows these expectations or if it channels Turkey and Brazil and hits economists with a surprise rate hike.
All eyes are on Nigeria.
Food price inflation is a particular problem because the poorest population spends disproportionate amounts of their income on food, and food price inflation can be devastating for them.
In Nigeria, the inflation rate in February rose to 17.3%, from 16.5% in January and from 13.7% six months ago. Despite rising inflation, the Central Bank of Nigeria maintained its interest rate at 11.5% at the January meeting. Nigeria’s economy is currently in stagflation, and rising rates may affect the economy even more, but allowing inflation to accelerate may get ugly.
Market prices in India are the fastest-squeezing in Asia. RBI says no.
India’s inflation rate jumped 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 basic repurchase rate at 4%. RBI Governor Shaktikanta Das followed the line of Fed Powell president to maintain accommodative monetary policy as long as necessary to support the recovery. And for now, inflation remains within the broad RBI target range of 2% to 6%.
But markets are beginning to price rate hikes. Yield on three-month government bonds has increased by about a quarter of a percentage point since the beginning of January, and today stands at 3.32%. Given the three-month term of maturity, the rate reacts to the expected movements within those three months.
India’s five-year interest rate swap rates rose 63 basis points in February, the biggest monthly move since the 2013 rage crisis, according to Bloomberg. On Wednesday, the five-year swap rate closed at 5.38%, down from 4.5% in early January. According to Naveen Singh, head of fixed income trading at ICICI Securities Primary Dealership in Mumbai, cited by Bloomberg, these swaps are pricing rate increases of about 1 percentage point next year, which would be the quickest tightening of all. the countries in Asia.
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