Moscow: 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 US 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.
