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Fed's Greenlight for EM Central Bank Easing

5 August 2019EconomicsPoliticsEmerging Markets

Feds recent rate cut has opened doors for Emerging Market (EM) central banks to do the same, without having to worry about FX instability and capital outflows. In addition, lower than expected CPI across the region provide greater policy flexibility.

The negative impact of US-China trade conflict is becoming more visible in the trade data of neighboring Asian economies. Export growth of South Korea, Hong Kong, Singapore, Indonesia and Thailand have been in contraction since the beginning of the year and worsened further in June. Countries with sharpest declines are likely to be earliest to ease.

China's top decision-making body, the Communist Party's Politburo meeting held on 30 July, also reaffirmed that monetary policy will remain prudent to "keep liquidity reasonably ample". Citi analysts expect further targeted Reserve Requirement Ratios (RRRs) cuts and potential medium-term lending facility (MLF) rate cuts to support smaller banks and the private sector.

Feds Greenlight for EM Central Bank Easing

Past performance is no guarantee of future results, real results may vary.

Global economic growth indicators remain subdued, weighed by ongoing trade tensions, Brexit (no-deal scenario) and tepid global demand growth.

Citi analysts believe that the easing bias by central banks globally makes for a relatively positive environment for both bonds and equities in Emerging Markets, as policy support takes place amid a lukewarm economy, and before asset bubbles are formed.

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