We have developed a set of interest rate indexes to track broad trends in monetary policy across the globe. The index is essentially a GDP weighted average interest rate, thus the index can also be used to estimate the cost of capital, assessing monetary policy tightness/looseness, and other macro economic and financial market analysis for the broad groups. There are four indexes: All, Developed, Emerging, and Lesser Developed & Frontier markets. The full methodology and components are detailed below.
As can be seen in the initial print of the chart, emerging markets and LDF markets were generally tightening rates during 2011, but have begun to reverse course given the the uncertain environment and deterioration in global economic conditions. As at January the indexes stood as follows: All 2.77% (2.58% in 2011), Developed 0.68% (0.70% in 2011), Emerging 6.52% (6.05% in 2011), and Lesser Developed & Frontier 7.13% (6.09% in 2011). Compared to the previous month the indexes have moved as follows: All -2bps, Developed unch., Emerging -6bps, LDF -2bps.
The index is useful to monitor for gauging global macroeconomic trends, but also assessing the relative attractiveness of emerging market investments vs developed market investments. For example, the turn in emerging market interest rates may be positive for emerging market equities.
The LDF countries are less investable than emerging and developed, but extreme movements are worth noting, e.g. the aggressive tightening moves in 2011 due to rising commodity prices.
The indexes may also provide some merit in terms of the gap between emerging and developed markets and the implications for the foreign exchange outlook.
The indexes are compiled using our proprietary global central bank interest rate database, and IMF (International Monetary Fund) GDP statistics from 2010 to calculate GDP weightings for each group. The groupings for Developed and Emerging markets are based loosely on the MSCI indexes, but as noted weightings are calculated using 2010 GDP. The LDF index comprises all countries that did not fall into the Emerging or Developed categories. Each index has the following number of components: All 81, Developed 13, Emerging 21, LDF 47.
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