MACRO ECONOMIC NEWS

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Macro-Economic News 08 Feb 2021

 

The central banks of Russia, Brazil, Peru, Argentina, Ghana, Hungary, and the Philippines are expected to hold despite inflation pressure building up, while Mexico may reduce the rate marginally. Although inflation may remain volatile for some time, the policymakers can and should afford to hold the guiding policy rate as the economic activities are showing up encouraging growths. 

The rising debt and lower interest rates across economies are raising numerous eyebrows. The yields of traded debt instruments are getting stretched and disrupting the ‘pure expectation theory’ in the short run - causing a swivel in yield structure and volatility in currency exchange rates. These are not in sync and it often causes emerging (read weaker) markets to finance the current account deficit of developed (read stronger) economies. For example, last week Mario Draghi – Italian Prime Minister-designate –was supported by the bond market while the currency market saw a Euro depreciating.  

 

No wonder that monetary experts are suggesting the issuance of longer tenure bonds and inflation linked bonds. However, in the short run, central banks may leave inflation-targeting a little loose for some time now. For them getting back to the coordinated policy directionality will slowly become difficult due to significant correlation breakdown in (emerging market) responsiveness to yield structure of developed markets. RBI as well might intervene in any temporary surge in yields.

Most countries are on the verge of removing any ban on (pandemic hit) businesses. Although various countries, including South Africa and Russia, are falling prey to cash-crunch, income-divide, and wealth-gap. A large number of the population and corporates are unwilling to spend. Japan bank deposits rise at a record pace. 

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