Featuring: china | turkey | rate decisions

Monetary policy and inflation data may be overshadowed by the coronavirus.

Ongoing monitoring of the coronavirus and its potential economic impact

Market Relevance: The unknown elements of the virus pose downside risks to Chinese and global growth.

Gramercy View: We anticipate a slowdown in China’s growth rate in the first quarter to between 5.0% and 5.5% YoY as a result of the virus with the largest effect on retail sales and to a lesser extent, industrial production and investment.  At this juncture, we expect the economy to rebound in 2Q which should result in a modest impact on the country’s full-year growth rate albeit this remains subject to evolution of the illness. Regional economies are likely to also face downward growth revisions in relation to direct and indirect effects of the virus. While the coronavirus appears to be less lethal than the 2003 SARS outbreak and the Chinese authorities have responded more swiftly and transparently, the global economy and supply chains are much more intertwined now than in 2003, likely resulting in greater, albeit temporary and short-term, headwinds to world economic activity. Meanwhile, global monetary policy should remain supportive, although depending on the scope of EM depreciation, it may constrain easing ability for some countries.

Monetary policy rate decisions on 2/3: Kazakhstan, 2/5: Brazil and Poland, 2/6: Czechia, 2/7: Russia and Romania  

Market Relevance: Next week presents a flurry of monetary policy decisions and guidance by central banks across EM. In addition to the direct investment implications for EM rates and FX, the willingness and ability of central banks to maintain or increase monetary accommodation will be evaluated in the context of diminished real interest rate buffers across EM and the coronavirus outbreak in China tampering the otherwise improving EM economic outlook.

Gramercy View: We expect that the majority of EM central banks due to take interest rate decisions next week will remain on hold, so investors’ attention will be primarily focused on forward monetary policy guidance, as well as on updates regarding the central banks’ economic outlooks for the year. The two exceptions are in Brazil and Russia, where a 25bps policy rate cut is likely (in the case of Brazil) and possible (in the case of Russia). Brazil’s central bank is facing a balancing act between a currency that has been under pressure recently and a string of disappointing macroeconomic data since the start of the year. We believe a cut to 4.25% from 4.50% is likely given the most recent signals by policymakers. In Russia, we expect the Central Bank of Russia to remain on hold at 6.25% next week, having delivered 150bps of easing over five consecutive cuts in 2019. Mediocre economic growth in recent years was one of the key reasons behind the major government reshuffle that took place in January, but we expect the fiscal (not monetary) channel to take the lead in stimulating economic activity going forward, given Russia’s ample fiscal space and resources.

Turkey‘s inflation data for January on Monday

Market Relevance: Turkey’s ex-post real interest rates are back in negative territory as a result of the Central Bank of the Republic of Turkey’s (CBRT) aggressive front-loaded monetary easing cycle since July 2019 that slashed the key policy rate by 1225bps to 11.75%. The CBRT projects disinflation to continue and targets high single digits inflation by year-end 2020, but given that the high real rates buffer is now gone, even small deviations in actual inflation prints versus the official projections will matter for markets and especially the TRY.

Gramercy View: We expect the Turkish authorities’ economic policy mix in 2020 to be firmly focused on boosting activity and employment in the domestic economy regardless of the impact on Turkey’s structural vulnerabilities, which leaves us concerned about monetary policy miscalculations in the event inflation overshoots official projections. Unless inflation dynamics validate the authorities’ outlook, which is overly benign in our view, we expect the TRY to remain under pressure despite arguably being fundamentally undervalued at current levels.

Please contact our Co-Heads of Sovereign Research with any questions:

Kathryn Exum, Senior Vice President, Sovereign Research Analyst
[email protected]

Petar Atanasov, Senior Vice President, Sovereign Research Analyst
[email protected]

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