As optimism grows that more developing nations can start unwinding painful interest-rate hikes, policymakers in three big emerging markets still have work to do to bring inflationary pressures to heel and backstop their ailing currencies.
Central bankers in Turkey, South Africa and Russia — home to the three worst-performing currencies outside Argentina this year — will hold meetings this week to decide on their next monetary-policy steps. Economists surveyed by Bloomberg say rates will have to go higher in all three.
That contrasts with the outlook for emerging markets as a whole, where a chorus of banks from Goldman Sachs Group to Citigroup see stronger currencies and falling inflation creating leeway for loosening monetary screws. Taiwan, India, Indonesia, Poland and Mexico are among countries pausing hikes, while Hungary cut rates and Brazil says a cut is possible in August.
The same dynamic doesn’t hold, however, in South Africa, where economists expect the central bank to hike the benchmark rate for the 11th time in as many meetings, while Turkey and Russia also look set to keep raising borrowing costs. By the end of the week, analysts expect Russia’s key rate to rise to 8%, South Africa’s to 8.5% and Turkey’s to 18.5%.
“These central banks all have in common still persistent inflationary pressures,” said Brendan McKenna, emerging-markets economist and FX strategist at Wells Fargo Securities LLC in New York. “South Africa, Turkey and Russia all clearly have not had the same degree of progress on disinflation as the majority of the EM complex.”
Currency outliers
Central bankers in South Africa and Turkey may have the most clout in terms of their ability to influence their respective currencies, said McKenna. The Turkish lira has lost about 30% of its value against the dollar this year, while Russia’s ruble is down 19% and South Africa’s rand 5%. That contrasts with a 2.3% gain in MSCI’s emerging-market currency gauge.
“Other emerging-market currencies that have done well are supported by high rates and solid fundamentals. You can’t say that about the rand, lira, and ruble,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “I don’t think they will do well even as they hike and others cut.”
South Africa’s local-currency bonds have given investors a loss of 1.7% in dollar terms so far this year, while Turkey’s have generated losses of more than 40%, compared with a positive return of 4.1% across emerging markets as a whole. Russia has been made practically uninvestable for most foreign banks since its invasion of Ukraine last year.
Here’s a closer look at each of the policy decisions due this week:
South Africa
- Central bankers meet on Thursday
- The country’s inflation rate fell below the central bank’s target in June for the first time in 14 months, Pretoria-based Statistics South Africa said Wednesday
- Policymakers will probably raise the benchmark by 25 basis points to 8.5%, according to the median estimate in Bloomberg survey
- The rand has gained 1.4% over the past month, while the lira and ruble have continued their slides
- “We favor South African local markets by a considerable margin over those of both Russia and Turkey,” said Hassan Malik, global macro strategist covering central and eastern Europe, the Middle East and Africa at Loomis Sayles in Boston. “The currency is arguably cheap, the country’s export basket will likely prove resilient in the event the Ukrainian war drags on, while local bonds offer some of the highest yields of major emerging markets globally”
Turkey
- Turkey’s central bank will also announce its interest-rate decision on Thursday
- Policymakers are expected raise the key policy rate for a second consecutive month to 18.5% from 15%, according a Bloomberg survey, after disappointing investors with a smaller-than-expected hike last month
- Turkish policymakers need to reassure markets that they’re serious about piloting the management of the economy back to more orthodox path, according to McKenna at Wells Fargo
- The lira may stabilize if they deliver a larger rate hike than the market expects, but likewise sell off sharply if the increase is “underwhelming,” McKenna said
- “Turkish bonds may be particularly exposed to negative effects in the event of an expected rate hike. Looking at the actions of the Turkish central bank over the past year, it is difficult to see their monetary policy as entirely sensible,” said Grzegorz Drozdz, market analyst at Conotoxia Ltd.
Russia
- Russia’s central bank will announce its rate decision on Friday
- Officials will probably increase the policy rate by 50 basis points to 8%, according to a Bloomberg survey and Bloomberg Economics
- Inflation expectations rose to 11.1% in July from 10.2% in June, the central bank reported on its website on Monday. That’s the highest since February
- “According to almost every data point, Russia’s economy is overheated,” Bloomberg Economics Russia economist Alexander Isakov wrote last week. “In addition, forward looking indicators are heavily skewed toward higher inflation. The ruble has lost 9% in the last 3 months and retailers are indicating that durables’ prices will match this move over the summer. The central bank’s guidance is expected to be hawkish and suggests further hikes are on the table for the next meeting in September”
- Russia’s exchange rate has become “distorted” due to the war in Ukraine and policy moves will be of little concern for traders until “trapped offshore investment can be repatriated,” said Thin at Brown Brothers Harriman
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