The FED, interest, BRICS and beyond

The world’s eyes have been on the U.S. for some time… Even the smallest news of when the Fed will head for an interest rate hike increases the tensions of the global markets. Volatile up and down tensions are all but causing investors panic attacks.

Should the indicators be followed, the Beige Book be read, the jack-of-all-trades Federal Reserve chairmen be listened to, or should the roll documents’ words be scanned high and low; none of this is enough.

This effect of confusion combined with panic is a separate ruling in the developing world. Already facing difficult periods, these economies are at a loss worrying about the Fed as well. The monetary policy, especially in the meaning of the global boom, has come to a dizzying state.

In this context, it would be beneficial to take a look at the latest state of the countries being aforementioned. Even though many respective economies from Peru to Indonesia are seeing activity, within the bounds of the column reserved for us, let’s focus on the most distinguishable rising economies of BRICS.

B: GOING THROUGH HARD TIMES

The rumors of wanting to be dismissed as the head of the bloc summarize the situation in Brazil. The elections in the month of October led us to examine Brazil’s situation in a separate column. After then, Rousseff’s continuation so far has not benefited the economy much. 2014’s 2nd and 3rd quarters’ shrinking economy, is not showing any hope for the Q4 figure to be announced in the coming weeks. Consumption is slow; investments are on the fall… While the economy is shrinking on one side, inflation has taken off. As for the Real, it inevitably lost a considerable amount of value. Under these circumstances, the Central Bank (CB) has become addicted to interest and went to rate hikes again this Wednesday: 50 basis points. In these days, Rousseff is under the unbearable weight of tightening, while recession is at its highest level.

R: BETWEEN COLLAPSE AND RESISTANCE

With the sanctions and the slump in oil, the fairly beaten-up Russia, while annually growing in the 3rd quarter of 2014 by 0.7%, is waiting for the imminent hopeless Q4 figure. Meanwhile, with food prices and the contribution of the decaying Ruble, inflation is in the state of leaping forward: Inflation has reached 16.7%, a 13-year high.

At the end of January, Russia’s CB, foreseeing that inflation was going to drop in mid-2015, made a surprise interest rate cut. With a 200 basis point reduction, Russia showed the world that it would act bravely in order to stop the bleeding. After leaving behind a crawling 2014, Russia’s pain, with the awaited shrinking, seems like it will increase in 2015.

I: SURPASSING CHINA

As for India, the government is also active in the CB. In the last period, the most attention grabbing news was the modifying of the calculating method for GDP. The method shouldn't be underestimated, growth proportions in the 2013 economy and onwards suddenly skyrocketed. For example, 2014's Q2 and Q3 speeds, sequentially, increased to 6.5% and 8.2%. As for Q4, it received a 7.5% growth. I'd like to point out that the new method has instilled uncertainty amongst everyone including CB President Rajan. However, at the end of the day, India has exhibited a faster pace in Q4. From now on, it seems it will continue in this manner. Already Modi's announcement last week on the budget plan, although leading towards compromise on discipline, was received quite well. Major expenses for spending on infrastructure for the roads, water and electricity for the public will reciprocate giving momentum to the growth speed. Fiscal policy is going hand and hand with the support of the CB, which announced a 25 basis point interest rate cut on Wednesday, the second one this year, which was quite frankly a surprise. Also to note, the slowing inflation has expanded Rajan's playing field.

C: ANNOUNCED IT WILL SLOW DOWN

On the other hand, in 2014 with a growth of 7.4%, China, who put its signature on its lowest growth since 1990, also announced yesterday that it’s slowing down will continue. The premier indicated that it aims for a growth of 7% in 2015 and signaled that their fiscal policy will be proactive.

Moreover, China’s CB resorts to monetary policy with frequent intervals. In February, the CB went to reductions with required reserves, while last week the decision for the 2nd interest rate cut in the past 3 months was made. The normal People’s Bank of China is also taking into consideration the declining inflation. In the country, aside from the lowest inflation rate of the last 5 years with 0.8%, capital outflows are drawing attention as well. With signals showing weakness in activity, the continuation of supporting activity is probable.

S: SLOW PACE CONTINUES

In Q3 of 2014, S. Africa revised its growth rate by 1.6% while portraying a 1.3% yearly increase in the last quarter. The stable shrinkage in the mining industry is affecting the country’s growth negatively. In this sense, throughout 2014’s 1.5% GDP growth, S. Africa has observed the slowest growth since 2009.

As for the CB, the last increase of interest rates made in July has not been changed despite the fall in inflation. As long as a stable fall in inflation is seen, there is a chance for a reduction in interest rates. As for now, it is an involuntary stance on the subject at hand. Ultimately, when looking at BRICS in general, it is seen that the midfield of the bloc is trying to be revived with political support. It is no doubt that 2015 will be a year of struggle throughout both BRICS and the world.

PERIOD OF PATIENCE

If we turn back to our starting point, I don’t think that the FED will rush an interest rate hike that will affect BRICS and all of the developing economies. The U.S. economy is picking up, although stronger indicators are needed. In addition, inflation has gone to the negative side. Also the negative effects of the strengthening U.S dollar can surely be felt. Considering this, a rushed increase doesn’t seem reasonable. There is a chance that Yellen’s eagerly awaited decision may be delayed until the 2nd half of the 2nd quarter.

In this time frame, it is obvious that the diverging global monetary policy will last at a competitive rate. It is going to be hard to settle the stir throughout the world, from developing to developed countries.

As I am writing my final words, the European Central Bank's decision from Cyprus is on my mind. However, without being able to wait for it and add it, I need to get this article to the team.

Have a great weekend…

#BRICS

#FED

#interest

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