By Nikolay Markov, Senior Economist at Pictet Asset Management

In recent months, most major emerging market central banks have sharply cut their policy-rates to alleviate the negative economic shock of the pandemic. But is this sustainable and what can we expect going forward?

Estimating equilibrium

According to our proprietary calculations, four major EM central banks have cut their policy rates too aggressively: South Africa, India, Indonesia and, by some margin, Turkey.

That sinking feeling…
Fig.1  – Policy rates in select emerging market versus our fair value estimates of equilibrium  using our proprietary Taylor Rule mode

Source: Pictet Asset Management, Refinitiv, CEIC, August 2020

Using our proprietary Taylor Rule model, we calculate the fair value for Turkey’s policy rate as 14 per cent, not 8.25 per cent. This is based on the recent upsurge in inflation and domestic currency depreciation. By contrast, the Bank of Russia and Bank of Korea appear to have made appropriate policy responses.

What about the next 12 months?

Fig.2 shows our expectations for policy-rate changes in the year ahead based on our fair value estimates. For most emerging markets the estimated policy-rate fair value is much higher in 2021. This shows that most central banks have no room to cut further and should gradually revert to higher rates as the economic shock of the pandemic subsides.

The road back…
Fig. 2 – Implied policy rate changes in 2021 based on our estimates of changes in fair value in 2021 and the actual policy rate in Q3 2020

Source: Pictet Asset Management, Refinitiv, CEIC, August 2020

The most striking cases are in South Korea, South Africa and Russia. While we think these markets have appropriately cut their policy rates during the outbreak, we believe they will need to start raising rates more quickly in 2021 as their economies are expected to rebound at a stronger pace.

For other central banks however, it might be appropriate to keep their monetary policies broadly unchanged in 2021. This is particularly true in Mexico.

n recent months, most major emerging market central banks have sharply cut their policy-rates to alleviate the negative economic shock of the pandemic. But is this sustainable and what can we expect going forward?

Turkey is once again an interesting case as our model calls for significant rate cuts in 2021, in sharp contrast with the policy recommendation for the current quarter.

This is explained by the significant disinflationary process and expected gradual recovery in economic growth which should take place in the coming year if the authorities take the appropriate policy measures to stabilise the lira, thus avoiding a full-blown balance of payments crisis. If this positive scenario materialises, it should be positive for Turkish risky assets in the coming year.

Bottom line: it will get worse before it gets better.

Time to look beyond rates?

But if the scope to move EM policy-rates is increasingly limited, what about unconventional monetary tools to stimulate the economies?

The table below shows that only the central banks of South Africa, Indonesia and Poland have opted for an asset purchase program (QE) of government bonds in the secondary market (and in the case of Indonesia possibly covering corporate bonds).

Most of the major EM central banks (China, India, Korea, Turkey, Russia, Brazil and Mexico) do not have a proper QE program yet. Still, those countries have introduced different refinancing facility schemes to provide ample liquidity to the interbank market thus supporting bank credit activity and the real economy.

The state of play
Fig. 3 – Our views on policy of select emerging market central banks

Source: Pictet Asset Management, Refinitiv, CEIC, August 2020. *Based on our Taylor Rule model.

Close to half of the major EM central banks are expected to ease monetary policy further in the coming months. This is the case in China, Indonesia, Russia, Brazil and Mexico, suggesting that market participants and possibly even the central banks themselves do not think they have actually run out of ammunition.

But as suggested by our model, we believe further monetary policy easing will be very challenging in particular for South Africa and Russia, as well as for Turkey in the near term.


Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets
could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document. Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg. Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73. Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited. Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore. For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001. For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act. Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet.