For the second time this month, an emerging market central bank has hiked rates in the face of political pressure to do the opposite.
On September 6, while speaking at a conference in Moscow, Russian Prime Minister Dmitry Medvedev said the following about the economy and monetary policy:
It’s necessary to move from neutral to stimulating oversight of the credit sphere to create conditions for more confident economic growth. Interest rates remain quite high despite the successes in holding back inflation.
The timing of Medvedev’s implicit call for a rate cut left something to be desired. The ruble is laboring under the pall cast by U.S. sanctions leveled in retaliation for the Skripal case and is also at risk of succumbing to the generalized angst that’s swept across emerging markets in 2018 amid a persistently hawkish Fed and a rising dollar.
On Thursday, State Department assistant secretary for Bureau of Economic and Business Affairs, Manisha Singh, said the following with regard to Skripal-related sanctions:
We plan to impose a very severe second round of sanctions. [These will include] banking sanctions, prohibition on procurement of defense articles, aid money — it’s a laundry list of items that will penalize the Russian government.
Perhaps more concerning is the threat that legislation proposed by Lindsey Graham and Democratic Senator Bob Menendez will get traction on Capitol Hill, leading to sanctions on Russian sovereign debt.
Read more on the so-called “nuclear option”
Meanwhile, inflation is projected to pick up in Russia. Inflation expectations (white line) and annual inflation (blue line) are rising:
The ruble, the fourth-worst performer in EM FX last month, is sitting near its weakest levels against the dollar since March 2016.
Hopefully you can see why it was a bad idea for Medvedev to encroach on central bank independence last week. This just isn’t the time and his comments had the potential to undermine Elvira Nabiullina’s credibility with the market.
Well, consider her credibility intact, because the Bank of Russia surprised 41 out of 42 economists surveyed and delivered a rate hike on Friday, lifting the benchmark rate to 7.5% from 7.25%. That’s the first hike since 2014.
Additionally, they hinted that more might be in the cards. “Bank of Russia will consider the necessity of further increases in the key rate, taking into account inflation and economic dynamics against the forecast, as well as risks posed by external conditions and the reaction of financial markets,” the bank said.
The ruble spiked on the news although it goes without saying that it’s not going to react as dramatically as the lira did to CBT’s Thursday hike.
This will likely help bolster EM sentiment further, although again, it probably won’t pack quite the same punch as the Turkey hike when it comes to the read-through across the EM complex because folks weren’t nearly as concerned about CBR as they are about CBT.
More to the point, EM policymakers are clearly worried about the potential for further dollar strength and unpredictable U.S. economic and foreign policy to pile ever more pressure on developing economies. What you’re witnessing is a scramble to get out ahead of that.