Rate-Cutting Race Among BRICS Outliers Pits Russia, Brazil
(Bloomberg) -- The race to ease monetary policy in Russia and Brazil may come down to factors neither of the central banks can control.
Even after months of rate cuts, the two economies continue to endure some of the world’s highest borrowing costs when adjusted for inflation. While both countries are still consumed by crises as they try to put two years of recession behind them, the political turmoil gripping Brazil leaves its central bank facing a tougher task ahead, according to Morgan Stanley, Capital Economics and Renaissance Capital.
For Morgan Stanley, Russia’s “domestic political stability and a sustainable debt situation” simplify the central bank’s job after it delivered only three rate cuts totaling 1 percentage point since September. That compares with 4 percentage points of monetary easing in Brazil over the same period.
Brazil’s 10.25 percent key rate will end the year at 8.5 percent, while Russia’s benchmark will reach 8.25 percent, from the current 9 percent, according to the median forecasts in Bloomberg surveys.
“Domestic political stability means less pressure on the government to turn populist, and hence more prudent fiscal policy,” Alina Slyusarchuk, London-based economist at Morgan Stanley, said by email.
Tensions with the U.S. and a threat of broader sanctions may have played a role for the Bank of Russia at a meeting this month, when it opted for a smaller rate cut than in April. A more daunting challenge looms for policy makers in Brazil, where President Michel Temer was charged with corruption that may put the embattled leader of Latin America’s largest economy on trial. Temer, who has denied the charges, could lose his job if indicted and found guilty.
“In Brazil, the politics is more uncertain, which means that the central bank is perhaps more likely to have to reverse course should the currency suffer a renewed sharp fall,” said Neil Shearing, chief emerging markets economist at Capital Economics. “For that reason, it’s probably fair to say that they have the toughest job over the next six months.”
Although Russia’s longest recession this century has deepened public discontent, President Vladimir Putin’s approval ratings remain high going into elections in March 2018. A poll last month showed that 63 percent of Russians would vote for him if ballots were cast now, 55 percentage points ahead of the next most popular politician, according to the Moscow-based Levada Center. The Russian leader hasn’t yet confirmed he’ll run, but he’s widely expected to seek a final six-year term.
Monetary easing in Brazil and Russia is putting them at odds with a tightening cycle by the U.S. Federal Reserve, which raises the risk of capital outflows from developing nations. The few other emerging economies still pushing ahead with rate cuts include Colombia and Ukraine.
“Emerging-market monetary policy has largely decoupled from the Fed, at least for now,” said Win Thin, head of emerging-market currency strategy at Brown Brothers Harriman. “Most countries that do not have a peg in place are finding that they do not need to match the Fed, and are either cutting rates or keeping steady rates.”
Many of the largest emerging markets prefer to stand pat. The Reserve Bank of India has kept its main rate unchanged at 6.25 percent since October, while South Africa’s central bank is holding its benchmark at 7 percent for more than a year.
By contrast, Russia and Brazil are bringing the cost of money lower following currency crises accompanied by spikes in inflation. As their central banks forge ahead with easing, however, investors anticipate the Russian ruble and the Brazilian real will remain among the most unstable currencies in emerging markets, with a gauge of three-month implied volatility trading at around 13 percent for both, according to data compiled by Bloomberg.
“Probably Russia has it easier, because markets can have more faith that fiscal policy will remain responsible,” said Charles Robertson, London-based global chief economist at Renaissance Capital. “That is not certain in Brazil, due to the possible change of president in the near to medium term.”