“A front-loaded and strong additional monetary tightening.”
By Wolf Richter for WOLF STREET.
In a shock-and-awe move, the Central Bank of Turkey today jacked up its policy rate, the one-week repo rate, by two full percentage points, from 17% to 19%. Economists had expected a rate hike of half that magnitude.
The Monetary Policy Committee said in its press release that, considering the inflation developments – the inflation rate had jumped to 15.6% in February – it “has decided to implement a front-loaded and strong additional monetary tightening.”
And more hikes are on the way: “The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability.”
The battered lira – over the past five years, it has plunged 60% against the US dollar, even after the 15% rise since the low point in November – jumped 1.5% today against the dollar.
Turkey’s government and corporate sector have borrowed heavily in foreign currency, primarily in euros and dollars. That debt gets difficult to service with a plunging lira. This has left Turkey teetering on the edge of a financial crisis for the past three years.
Other developing economies are now facing a similar quandary: Inflation is shooting higher, their currencies need to be propped up, and debt levels have exploded during the Pandemic from already high levels.
Brazil’s shock-and-awe rate hike yesterday.
The Central Bank of Brazil put down the hammer with a rate hike of 0.75 percentage points yesterday, bringing its Selic rate to 2.75%. A rate hike had been expected but not a Volker-type surprise monster.
And it said that another biggie of “the same magnitude” is likely to come “at the next meeting.”
The primary topic in the statement released by the rate-setting committee (Copom) was inflation, and the rate hike was designed to combat it. Inflation shot up to 5.2% in February from 4.6% in January.
“The continuing increase in commodities prices, measured in local currency, are affecting current inflation and triggered additional increases in inflation forecasts for the next months, especially through its effects on fuel prices,” it said.
“The various measures of underlying inflation are in levels above the range compatible with meeting the inflation target,” it said.
And it added that “the Committee maintains the diagnosis that the current shocks are temporary.” Which is what the Fed has said it will say when inflation numbers become ugly over the next few months.
The Bank of Brazil is tightening monetary policy – engaging in “a partial normalization process,” as it said – because the stimulus is not needed anymore, with GDP “growing strongly at the margin” at the end of 2020, with inflation expectations “above target at the relevant horizon for monetary policy,” and with inflation projections “close to the upper bound of the target for 2021.”
Central Bank of Russia meets on Friday: Shock and awe for economists who expect no rate hike?
On March 19, the Central Bank of Russia – facing an inflation rate that has shot up to 5.7% in February from 5.2% in January, and from 3.7% six months ago – is expected by 27 of 28 economists polled by Reuters to maintain its policy rate of 4.25%, but communicate to markets that it will raise rates soon.
Are these economists underestimating the will of the Bank of Russia to fight inflation, like they underestimated the will of the central banks of Turkey and Brazil? Are they in for another shock-and-awe treatment?
The inflation target of the Central Bank of Russia is 4%, and that target was hit in October and now there’s the overshoot of 5.7%. When the inflation data was reported 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 this statement, there was nothing about being happy with the overshoot and allowing the overshoot to overshoot further, as the Fed might say.
At its last meeting on February 12, the Bank of Russia kept its policy rate at the record low level of 4.25%, but the statement focused on inflation. “Prices continued to grow at an elevated pace,” it said. Amid demand that “is recovering faster and more sustainably than expected,” supply restrictions continued “to exert upward pressure on prices.” And inflation expectations by households and businesses were “elevated.”
Then it said that rate hikes are on the horizon: “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?” That would be 5% to 6%, according to Central Bank Deputy Governor Alexei Zabotkin last week, cited by Reuters, and this was possible sooner rather than later, he said.
Following this statement, economists now expect for the Bank of Russia to lay additional groundwork at tomorrow’s meeting, on top of the groundwork it has already laid, for a rate hike at the April or May meeting. So let’s see if the Bank of Russia follows those expectations or if it channels Turkey and Brazil and hits the economists with a surprise rate hike.[Update, Friday, March 19: Yes, you guessed it. Against the expectations of 27 of the 28 economists polled by Reuters, the Bank of Russia at its meeting today raised its policy rate by 0.25 percentage points to 4.50%. “In the first quarter, the rate of consumer price growth has been higher than the Bank of Russia’s forecast,” it said in the statement, adding “The fast recovery of demand and elevated inflationary pressure call for a return to neutral monetary policy.” And it “holds open the prospect of further increases in the key rate at its upcoming meetings.”]
All eyes are on Nigeria.
Food price inflation is a particular issue because poorer population spend disproportionate amounts of their income on food, and food price inflation can be devastating for them.
In Nigeria, the inflation rate in February surged to 17.3% from 16.5% in January and from 13.7% six months ago. Despite the surge of inflation, the Central Bank of Nigeria kept its policy rate at 11.5% at the January meeting. Nigeria’s economy is in stagflation currently, and raising rates could hit the economy further, but allowing inflation to accelerate could turn ugly.
India’s markets price in most rapid tightening 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 benchmark repo rate at 4%. RBI Governor Shaktikanta Das has stuck to Fed Chair Powell’s line to keep monetary policy accommodative 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 beginning to price in rate hikes. The three-month government bond yield has risen by roughly a quarter percentage point since early January, and is today at 3.32%. Given the three-month time frame of the maturity, the rate reacts to expected moves within those three months.
India’s Five-year interest-rate swap rates surged 63 basis points in February, the biggest monthly move since the taper tantrum in 2013, according to Bloomberg. On Wednesday, the five-year swap rate closed at 5.38%, up 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 in rate hikes amounting to about 1 percentage point over the next year, which would be the most rapid tightening of any country in Asia.
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