EC Always Darkest Before Dawn

Before this intensification of the virus, the Bank of Canada had seemed to be a candidate for an early exit from emergency policies. Now Norway's Norges Bank appears at the front of the line. At its last meeting in the middle of December, the central bank brought forward its anticipated first hike to the first half of 2022. Since the December meeting, the high-frequency data points suggest that economic activity and prices are more resilient than feared.

The economy contracted by 0.9% in the three months through November. It was also half as bad as economists were projecting. Underlying CPI, which adjusts for tax changes and excludes energy, rose by 3% year-over-year in December. The record drawdown from the sovereign wealth fund provided an early and strong fiscal cushion.

Two emerging market central banks of note meet as well next week. Turkey's new central bank governor Agbal has made several steps that have given notice that there is a new economic regime. On Christmas Eve, he delivered a 200 bps hike, outstripping median forecasts for a 150 bps move.

The one-week repo rate now stands at 17%. Inflation reached 14.6% last month. Since the end of last October, the Turkish lira has been the strongest currency in the world, appreciating by about 13.4% against the US dollar. It is still off a little more than 19% since the end of 2019. Over the past three months, the yield on its 10-year dollar bond has fallen by about 105 bps to 5.60%. The market is signaling another rate hike is not needed.

The South African Reserve Bank can also stand pat, though for different reasons. SARB cannot afford to cut any further. Its repo rate is at 3.5% and December CPI stood at 3.2%. After cutting by 300 bps last year, the central bank held steady at the last two meetings of 2020. The implied policy path of SARB's projections points to a rate hike in Q3 and Q4 this year, though we are a little skeptical that it can be delivered.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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