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Summary of the Document: EM Monetary Policy Outlook – After the Fed

Core Content

This document provides an outlook on monetary policy trends in emerging markets (EMs) in 2019, emphasizing the impact of global central bank easing, particularly from the U.S. Federal Reserve and the European Central Bank (ECB), on EM monetary policy decisions. It outlines the expectation of rate cuts in multiple EM countries, driven by both global and domestic factors, and includes forecasts and key country-specific insights.

Main Points

1. Monetary Policy Outlook for EMs

• Global Influence: Prospective monetary policy easing by advanced economy central banks (notably the Fed and ECB) is expected to encourage rate cuts in EMs.
• Domestic Factors: Slowing real GDP growth and low inflation in many EMs are reinforcing the case for rate cuts.
• Rate Cut Expectations: At least 10 EM central banks are expected to cut their benchmark rates in 2019, with several already planned for Q3.
• No Hikes Expected: There are no expectations of policy rate hikes in relevant EMs this year.

2. Market Expectations

• Lower Rate Forecasts: Markets now price in lower policy rates for EMs, reflecting a shift from previous expectations of rate hikes.
• Policy Rate Tracker: The document includes a tracker of market expectations for policy rate changes over the next 12 months, showing a trend towards easing.

3. Country-Specific Rate Cut Forecasts

• Egypt: Expected to cut rates by 100bp at the September meeting, following disinflation and fiscal adjustments.
• Brazil: Possibly enters negative GDP growth again in Q2, with inflation still low. A 75bp rate cut is expected this year, starting with a 25bp cut in Q3.
• South Africa: A 25bp rate cut in July has gained traction, with further cuts possible if global factors intensify.
• Mexico: A total easing cycle of 150bp is expected, starting with a 25bp cut in September, due to falling inflation and weak growth.
• Indonesia: Two 25bp rate cuts are expected this year, beginning on 22 August, due to concerns over IDR appreciation and low inflation.
• Turkey: A significant rate cut of at least 400bp is anticipated this year, with a total easing cycle of 900bp by end-2020.
• GCC (Gulf Cooperation Council): Saudi Arabia and the UAE are expected to cut rates by 25bp following the Fed's July meeting, and to track U.S. rate movements thereafter.

4. Key Economic Indicators

• Inflation: EM CPI inflation continues to decelerate, with many EMs experiencing downside surprises and slowing core inflation.
• Growth: Real GDP growth in several EMs has entered negative territory, and PMI indicators are in contraction, signaling weak economic performance.
• Policy Frameworks: Improved policy frameworks in some EMs are also contributing to the easing trend.

5. Risks and Uncertainties

• Policy Disruption: Domestic uncertainties, such as presidential elections in Argentina and fiscal challenges in South Africa, could affect the pace and extent of rate cuts.
• Labour Market Pressures: Tight labour markets in Central Europe and East Asia may lead to wage pressures, potentially influencing monetary policy decisions.
• Global Growth Deterioration: If global and local growth worsens further while inflation remains low, the outlook for EM rate cuts could become more negative.

Key Information

• The document is authored by the Strategist and Economist teams of BNP Paribas.
• It is a marketing communication and not independent research.
• It is intended for professional clients and eligible counterparties under MiFID II.
• The document may include "Research" as defined under MiFID II unbundling rules, which is only available to certain firms that have signed up for BNPP Global Markets Research packages.
• The content may contain performance data based on back-testing, which is for illustrative purposes only and not indicative of future results.
• BNPP may have conflicts of interest due to its involvement in investment banking, underwriting, and advisory services related to the markets and instruments discussed.
• The document does not constitute an offer to sell or purchase any financial instruments and should not be relied upon as such.

Conclusion

The document underscores the likelihood of further monetary easing in EMs in 2019, driven by both global and domestic factors. It highlights the expected rate cuts in key EM countries and outlines the risks and uncertainties that could affect the pace of these cuts. The analysis is based on market expectations, economic indicators, and policy frameworks, with a focus on the broader implications of global central bank actions on EM monetary policy.