Adding to the stable of the Global Monetary Policy Rate Index, we introduce the Emerging Markets sub-index; a GDP weighted composite interest rate indicator for 21 emerging markets. The Index has been built out to January 2000. In addition to the Emerging Markets sub-index, we will also look at the Emerging Markets [EM] + Developed Markets [DM] composite index; providing a virtually global indicator of monetary policy rates. The use of DM and EM indexes are also of interest in terms of spreads and relative movements, as will be explained.
(Click charts to expand)
First of all, as noted the emerging markets index (which contains the same countries as the MSCI Emerging Markets Index; however is constructed using annual IMF GDP weights; phased monthly using a 5-year moving average) has been extended back to January 2000. A quick look at the index shows the battle that many emerging markets were fighting with hyperinflation around the turn of the century, followed by a subsequent moderation of interest rates. The final stage is the financial crisis fallout; with a broad-based cutting of rates; followed by a broad hiking of rates in response to stimulus driven rises in commodity prices and aspects of demand driven inflation following the financial crisis response.
Moving on to the next chart, we have also prepared a new index, which provides a composite view (using the same GDP weighting methodology) of emerging and developed market monetary policy interest rates. The average across the life of the index is about 4.6%, which is probably close to the neutral rate (but perhaps a bit higher due to the upward skew of the emerging markets hyperinflation effect). The chart shows that while there had been the start of a normalization in global rates, the normalization has been paused as global growth has slowed and the euro crisis concerns have given cause for caution among central bankers.
Another angle of analysis now provided by the existence of the emerging markets and developed markets monetary policy rate indexes is to examine the spread between EM and DM interest rates. While the spread between EM and DM rates has converged since 2000, spread has been tracking back toward the average level of about 6.1%, which reflects the diverging economic prospects, and the Zero Interest Rate Policy pursued by a number of developed markets (e.g. Japan, U.S., Switzerland). The course of these interest rate spreads is likely to have influence on growth differentials and relative market valuations between EM and DM.
In conclusion, the extension of the Developed markets and Emerging markets indexes back to January 2000 provides a unique and interesting new analytic tool for economic research, forecasting, and investment strategy. The data series for the EM, DM, and EMDM indexes can be found in the Google document linked to below, we encourage you to use the data in your analysis, and invite comments on the index; please also let us know if you publish any analysis articles using the indexes.
Access the index data here: Global Monetary Policy Rate Index - Data
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.