Global Daily – EM central banks take centre stage

by: Georgette Boele , Aline Schuiling , Roy Teo

In this publication: The RBA and RBI stayed pat on Tuesday. More Emerging Market central banks will decide on monetary policy this week …most of them will likely leave policy unchanged…with the exception of the Central Bank of Russia. The RBNZ and central bank of Brazil to signal easing ahead. Private consumption was the main driver behind the pick-up in eurozone Q1 GDP growth; we expect growth to slow down again in Q2.



Global-Daily-Insight-8-June-2016.pdf (58 KB)


Central banks stayed pat on Tuesday…

As expected the Reserve Bank of Australia (RBA) left monetary policy unchanged on Tuesday. The RBA stated that, having eased monetary policy at its May meeting, holding the stance of policy unchanged would be consistent with sustainable growth in the economy and inflation returning to target over time. As a result, financial markets have reduced expectations that the RBA may reduce rates in the coming months, which supported the Australian dollar. The Reserve Bank of India (RBI) also left interest rates unchanged as expected but financial markets are more concerned whether Governor Rajan will stay for another term. Our Asia economist expects the RBI to keep the repo rate unchanged for the remainder of 2016. The RBI is now focusing more on improving monetary transmission. Moreover, inflation has risen, there are upward inflation risks stemming from wage increases and weather conditions and the economy has accelerated in Q1.


…and more decisions later this week

Later this week, more central banks will decide on monetary policy: the Reserve Bank of New Zealand, National Bank of Poland and central bank in Brazil  (8 June), Bank of Korea  and central bank of Peru (9 June) and Central Bank of Russia (10 June). We expect most of them to keep monetary policy unchanged. The RBNZ is likely to keep its powder dry, given strong gains in the terms of trade and resilient house prices. As financial markets are pricing in about 25% probability of a 25bp rate cut next week, the New Zealand dollar (NZD) may gain some support. However, we expect the RBNZ to resume its easing bias later this year in August. It is unlikely that the National Bank of Poland will ease monetary policy as economic growth remains healthy and  inflation will likely pick up later this year due to positive base effects. For the central bank in Brazil, we expect the guidance to point into the direction of future rate cuts, because of lower inflationary pressure, a stronger real and to support the economy. It is likely that Central Bank of Russia will reduce rates because inflation has fallen to levels last seen before the crisis and the economy is still relatively weak. It will likely ease by 50bp to 10.5%.


A further increase in Swiss FX reserves

The latest SNB FX reserves show that the SNB continues to pursue its policy to prevent the Swiss franc from strengthening. The last thing the SNB wants is a sharp strengthening of the franc, which would threaten Swiss exports and also push inflation lower again. Swiss economic growth is still vulnerable and disinflationary forces need to ease further. We expect that the SNB will continue its current strategy as long as:


  1. the ECB is easing monetary policy
  2. the global economy remains weak
  3. global trade remains weak
  4. Europe’s political situation remains uncertain, due to for instance the Brexit referendum (23 June) and Spanish elections (26 June 2016)


We expect EUR/CHF to stay close to 1.10 as SNB’s actions, loose monetary policy abroad and waves of risk aversion will balance each other out.


Eurozone Q1 GDP growth driven by private consumption …

The final estimate for Q1 GDP growth in the eurozone showed it came out at 0.6% qoq, in line with the first flash estimate. Growth in 2015Q4 was revised higher to 0.4% qoq from 0.3%. The details of GDP were published for the first time. Private consumption was the main driver behind the rise in GDP growth, it increased by 0.6% qoq, up from 0.3% in 2015Q4. Total fixed investment growth, in contrast, slowed down to 0.8% from 1.4% in Q4, while growth in government consumption declined to 0.4% from 0.5%. As the exceptionally mild winter weather seems to have had a one-off positive impact on residential investment, the slowdown in overall investment growth implies that investment in machinery and equipment probably cooled down in Q1. Meanwhile, net exports continued to reduce growth in Q1, shaving 0.1ppts off qoq growth after -0.3ppts in Q4.


… slowdown in growth expected in Q2

Meanwhile, a string of economic reports has signalled that GDP growth probably slowed down in Q2. Surveys such as the composite PMI and Economic Sentiment for April and May have remained consistent with GDP growth of around 0.2-0.3% qoq, while industrial production and retail sales lost momentum at the end of Q1-start of Q2. Overall our scenario for the eurozone economy remains one of ongoing modest recovery.