Oil Prices and Rate Hikes Favor Latam FX Over Asia and EMEA
By Win Thin
Malaysia central bank surprised the markets by hiking the statutory reserve requirement 100 bp bp while leaving policy rates unchanged at 2.75%. The bank noted that “While the stance of monetary policy is expected to remain supportive of growth, the degree of monetary accommodation may be reviewed given the sustained growth in the economy and risks to inflation.” We have long said that such macro prudential measures are not a substitute for orthodox rate hikes, but rather should be viewed as a complement. Note that the reserve requirement was cut from 4% in November 2008 to 1% in March 2009 even as the policy rate was slashed from 3.5% to 2.0% during that same period. Bank Negara hiked policy rates three times in 2010 from 2.0% to 2.75%, but has left rates unchanged since July 2010. Today’s move should be seen as a signal that policy will continue to be normalized, and that rates are likely to be hiked later this year in response to the ongoing economic recovery and rising price pressures. CPI rose 2.4% y/y in January, and is expected to rise further as the year progresses.
This comes after Bank of Korea hiked policy rates 25 bp to 3.0% earlier this week. However, the vote to hike then was not unanimous and so there is reluctance in Korea to use orthodox rate hikes to head off rising price pressures. RBI meets March 17 and is seen hiking rates again by 25 bp. More should be done given high inflation and strong growth, as RBI is still viewed as behind the curve. Same thing goes for Bank of Thailand, which hiked rates 25 bp this week to 2.5%. In Taiwan, the central bank is seen hiking rates 12.5 bp to 1.75% Mar 31. CPI rose 1.3% in Feb, and Gov Perng said inflation was “relatively mild” and suggests there is little official concern. In addition, the Taiwan cabinet approved a tax on speculative housing sales and luxury goods, after which Perng said that fiscal measures are more effective than rate hikes for cooling down the local property market. We see little risk right now that CBC deviates from its 12.5 bp per quarter tightening path.
There is not as much reluctance to tighten in Latin America. This week, Peru continued its tightening cycle with another 25 bp hike that brought policy rates to 3.75% from 1.25% in April 2010. Next week, both Chile and Colombia are expected to hike rates again. Chile is seen hiking 25 bp March 17 to 3.75% compared to 0.5% in May 2010. Colombia just started the tightening cycle last month after resisting, but rising inflation supports the view that it needs to hike again this month to remain ahead of the inflation curve. A 25 bp hike is seen March 18 that would take the policy rate up to 3.5%. Brazil stands out as the most resistant to further tightening, and dovish minutes from the March 1/2 meeting has the majority of analysts looking for no move at the April 19/20 meeting. Of the 51 surveyed by Bloomberg, only 6 look for a 25 bp hike and 1 for a 50 bp hike.
In EMEA, Poland, Russia, and Hungary stand out as the ones tightening, though we highlight risks of lower rates in Hungary now that a more dovish board has likely been put into place. Czech Republic seems likely to keep rates at 0.75% for the time being given low inflation and so is unlikely to follow the ECB in lockstep fashion when it starts tightening. Turkey and South Africa have cut policy rates recently, and while further cuts appear unlikely, we generally feel that these two will be very reluctant to hike rates in 2011.
The monetary policy outlook amongst the regions generally supports our view that Latin American currencies look most attractive now, with EMEA the least, and Asia somewhere in between but closer to Latin America. In addition, we have pointed out recently that many countries in Latin America have sizable oil reserves and are net oil exporters, including Argentina, Brazil, Colombia, and Mexico to go along with OPEC members Ecuador and Venezuela. As such, high oil prices are a net benefit for many of the major Latin American economies. Asia remains the most vulnerable in EM to a protracted spike in energy prices (though Malaysia and Vietnam are small net oil exporters), as does Eastern Europe.