EMERGING MARKETS WEEK-Wary eye on inflation and central banks
Sun Apr 20, 2008 12:41pm EDT
By Daniel Bases
NEW YORK, April 20 (Reuters) - Rising food and fuel prices in emerging market economies are putting a strain on many social and monetary systems and will continue to test the budding optimism that the worst of the credit crunch is over.
That optimism is based on actions taken by the Federal Reserve to support the U.S. financial system with ample amounts of cash for borrowing and aggressive accounting for bad loans on bank balance sheets.
Investors have looked to the rally in developed markets, and driven emerging market stocks up 1.37 percent .MSCIEF last week while narrowing the yield spread between EM sovereign bonds and U.S. Treasuries by 22.8 basis points to 264 11EMJ.
On April 24, minutes from Brazil's monetary policy committee, known as Copom, will be released, giving investors greater insight into why the Selic rate was raised 50 basis points to 11.75 percent. The move on April 16 was more than expected and lifted the borrowing rate for the first time in three years.
The minutes "will either confirm what the market is interpreting, which is a relatively short (interest-rate) cycle or not. If it doesn't, it will add to the growing volatility in Brazilian rates," said Eduardo Levy-Yeyati, head of Latin American strategy and economic research at Barclays Capital in New York.
"So far the market is taking it very quietly, in a sense. I think the market interpreted this statement as saying it was going to be front-loaded but short, maybe 150-200 basis points at the most," Levy-Yeyati said.
Brazil's markets are closed on Monday for a holiday, limiting trading activity in the region.
Paraguay's citizens are voting in a general election on Sunday to elect a new president, with ex-Roman Catholic bishop Fernando Lugo seeking to unseat the Colorado Party after more than 60 years of one-party rule. (For story, click on [ID:nN20329536].)
VIGILANT OR BEHIND THE CURVE?
In contrast, central banks in Mexico and Turkey left their interest rates unchanged last week.
In Mexico's case, concerns about a slowdown in the economic growth of its biggest trading partner, the United States, prompted policy makers to leave rates unchanged despite a spike higher in inflation.
The central bank said food and commodity prices were rising so fast that it will have to revise its inflation forecast in its next report on the pace of price increases.
Mexico's benchmark rate stands at 7.50 percent.
Meanwhile, Turkey's central bank held its interest rates unchanged, but also warned about rising inflation pressures.
Its overnight borrowing rate held at 15.25 percent and the lending rate stayed at 19.25 percent.
In a report from British banking giant HSBC, the accumulation of surprisingly strong inflation data is too strong to ignore.
"Against a backdrop where growth in most of the emerging world is refusing to slow materially, and where monetary policy is already quite loose (at least partly because of the fears of the 'coming' growth slowdown), the inflation shock is becoming dangerous for asset prices, including exchange rates," HSBC said.
"The result is that the trend in emerging market currencies is becoming increasingly divergent. Policy in many countries needs to respond as the window for a credible and preemptive response narrows. If policy does not respond, then currency weakness will begin to emerge," it warned.
HSBC points out the weakness in the South African rand and Turkish lira.
On April 23, South Africa reports March consumer and producer prices ECONZA while Turkey releases these numbers on May 2 ECONTR.
For emerging markets, the next big interest-rate decision comes at the end of the month in Poland. The base rate there is 5.75 percent.
March PPI was reported at 2.9 percent, down from 3.1 percent in February and below expectations.
However, some analysts expect tighter monetary policy in the months ahead.
"The strength of the real economy and ongoing inflationary concerns still suggest that interest rates need to be raised further. The market is split over an April or May hike," said a research note from RBC Capital Markets. (Editing by Gary Hill and Jan Paschal)
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