Cuts to interest rates can be expected around the world following dovish pivots from the European Central Bank (ECB) and the U.S. Federal Reserve, according to analysts at Deutsche Bank.
ECB President Mario Draghi could revise the central bank’s forward guidance on Thursday to signal a September rate cut, and markets are pricing in a 25 basis point cut from the Fed following its Federal Open Markets Committee (FOMC) meeting next week.
Deutsche strategists project that a host of emerging market (EM) central banks will follow suit, as they gear up to deliver extra stimulus and “contain the propagation of trade shocks.” Lower financing costs from central banks are generally aimed at stimulating economic growth by encouraging businesses to borrow and invest.
In a note published Wednesday, Deutsche Bank strategists Quinn Brody, Himanshu Porwal and Jim Reid revised down growth forecasts for emerging markets in 2019, suggesting that EM manufacturing activity “now exhibits a pattern of persistent weakness” similar to that in developed markets.
They therefore forecast cuts in Russia, South Africa, Turkey, India, Indonesia, Philippines, Vietnam, Brazil and Chile.
“Asian economies are being particularly weighed down by persistent trade policy shocks,” the note said, adding that in Latin America, growth expectations for Brazil and Mexico continue to deteriorate for 2019.
The South African Reserve Bank (SARB) last week announced its first cut to interest rates in over a year, lowering rates by 25 basis points to 6.5%, as Africa’s most industrialized economy tackles low inflation and its starkest contraction for over a decade in the first quarter of 2019.
Turkey’s central bank is expected to cut its benchmark rate on Thursday, after Turkish President Recep Tayyip Erdoğan sacked the former governor Murat Çetinkaya this month, criticizing him for declining the government’s requests for rate cuts.
Deutsche analysts determined, however, that the macro backdrop for Central and Eastern Europe, the Middle East and Africa (CEEMEA) has deteriorated less than in the rest of the emerging markets, with CEEMEA countries least under stress.
This is “notwithstanding contingent liabilities issues in South Africa, ongoing sanctions in Russia and potential for similar measures in Turkey,” the note added.
Aggressive Russian action needed
Russia’s economy has emerged from its 2015-2016 recession, but the recovery has been shallow and slow, a note from State Street Global Advisors senior economist Simona Mocuta highlighted. Russia has also been battling against a plethora of international sanctions.
“While growth picked up to 1.6% in 2017 and 2.3% in 2018, momentum has deteriorated once more — we now anticipate growth to relapse to under 1.5% this year amid lower oil prices,” Mocuta said.
She explained that the Russian central bank has walked back some of its recent tightening, but suggested this is unlikely to have much of an impact in the short term.
“Beyond these near-term constraints, medium- to long-term economic performance remains challenged by a stark lack of economic diversification and extremely poor demographics. Aggressive policy action to remedy these issues is needed, but does not seem likely,” Mocuta added.
