Analysis: Rate hike: emerging central banks feel the pain of inflation



South African banknotes featuring images of former South African President Nelson Mandela (R) are displayed alongside the US dollar banknotes in this photo illustration. REUTERS / Siphiwe Sibeko / File Photo

  • Analysts predict inflation will be more rigid in emerging markets than in emerging markets
  • Brazil has seen rates rise by more than 600 basis points over the next 12 months
  • Upward inflation trend in all regions, focus on food

LONDON, Nov. 3 (Reuters) – At the forefront of a global inflation shock, emerging market central banks are set to raise interest rates at a pace not seen in more than a decade – steps that will not fail not aggravate debt problems and harm equity markets.

Soaring price pressures have raised expectations for rate hikes, even for central banks in the United States, Australia and Britain. The subsequent increase in global borrowing costs will be very unwelcome for developing countries, many of which are struggling to return to pre-pandemic economic production levels.

Struggling with soaring food and energy prices, many emerging central banks are already in aggressive rate hike mode.

And as political tightening expectations rise for the United States, Britain and other advanced countries, money markets are betting that emerging markets will need to step up the pace of the upside.

“Many emerging markets are in an increasingly difficult situation,” said Manik Narain, head of emerging markets strategy at UBS, stressing that the current inflationary shock would prove to be much more permanent in developing economies than United States or Europe. “Markets anticipate a much faster tightening cycle in emerging markets than in developed markets, it’s a difficult balancing act.”

Emerging market inflation beats targets and beats interest rates

South Africa, Mexico, Poland and Turkey are all expected to hike rates by more than 200 basis points over the next 12 months, JPMorgan calculated. Latin America will see some of the biggest increases, with Brazil expected to rise by more than 600 basis points and Colombia by more than 400 basis points.

Data shows that price pressures are exceeding interest rates in a number of major economies, including South Africa, Mexico, Brazil and Turkey. In all regions, the underlying inflation trends are rising sharply. Mexico’s core inflation posted its largest bi-weekly increase for the first half of October since 1999, while Russian inflation climbed to nearly 8% despite exceptional rate hikes.

And with droughts haunting major agricultural producers such as Mexico and Argentina, food inflation is at the forefront of policymakers’ concerns, according to UBS’s Narain.

“If we start to see a lot of pressure on food prices, policymakers will find themselves in a very difficult situation.”

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Money markets may be too exuberant. Christian Keller, head of economic research at Barclays, expects central banks in emerging and developed markets to come up with fewer interest rate hikes than expected, but he nevertheless warned that “when your inflation expectations start to deteriorate, that’s when you need to act as a central bank. “


It’s a repeat of the age-old conundrum for emerging markets – the need to tighten policy just as economies need additional support.

Maintaining a real return differential to U.S. Treasury returns is also necessary to keep foreign investors in domestic markets and prevent capital outflows. Swift central bank action may have helped keep many emerging currencies relatively stable in 2021, helping to cap imported inflation.

Thus, in a year when the US dollar appreciated by almost 5%, the Brazilian real, supported by a cumulative 575 bps of rate hikes, lost more than 8% while the ruble actually fell. firmed 3.2% on 325 bps of rate hikes.

“An early hike not only helped manage inflation, but also avoided a 2013 tantrum scenario, and some central banks took the upper hand and saw their currencies do well,” said Robert Ojeda-Sierra at Fitch. Ratings.

On the other hand, markets that have not sufficiently adjusted their monetary policy have suffered: the Turkish lira, affected by the fall in interest rates in the face of high inflation, has fallen by more than 20% this year. Read more

Emerging market interest rates

Most central banks recognize that the only way is to go up.

In October, Russia opted for a 75 basis point hike, but the central bank had considered a 100 basis point hike, which Governor Elvira Nabiullina said cannot be ruled out in the future.


But while currencies have been spared, the impact of rising interest rates is being felt elsewhere.

Emerging equities (.MSCIEF) are treading water in 2021, contrasting with gains of over 20% on the S&P 500 (.SPX) or the 16% rise in global equities.

With nominal growth rates in major emerging markets such as Brazil and South Africa falling below interest rates, these pressures will come to the fore again.

Bond markets will see debt service and borrowing costs rise, all the more painful after the debt burden increases in the era of the pandemic. Yields on JPMorgan’s local emerging debt index have risen by more than 150 basis points this year. (.JGEGDCM)

Central banks might be ready to act, but ultimately the outcome will depend on how quickly and quickly U.S. interest rates rise. Labor market price pressures are likely to cause a larger tightening than energy or commodity prices.

Reporting by Karin Strohecker, additional reporting by Andrey Ostroukh in Moscow and Marc Jones in London; Editing by Emelia Sithole-Matarise

Our Standards: The Thomson Reuters Trust Principles.



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