EM Hiking Cycle – The End Is Nigh?
29 July 2022
Read Time 2 MIN
EM Rate Expectations
The peak rates chatter refuses to go away – and there are good reasons for that. First, emerging markets (EM) central banks frontloaded a lot of rate hikes, and real policy rates adjusted by expected inflation are now very positive (maybe even contractionary) in quite a few EMs. The recent “super-sized” and off-cycle rate hikes helped to cement this perception, and the market (mostly swap curves) now see no additional tightening in most of Central Europe (Poland, Czech Republic) and relatively small hikes in parts of EM Asia (South Korea, Malaysia – see chart below). Colombia’s expected 150bps rate hike this afternoon will narrow the largest gap between the actual and the expected policy rate among major EMs. And Brazil’s +50bps move in early August will bring it one step closer to the end of the tightening cycle.
Inflation Peaks
The second point is that even though inflation is still extremely high across EM – especially in EMEA and LATAM – it might finally be peaking in some countries. Brazil’s mid-month inflation definitely fits that definition. Poland’s annual headline inflation was unchanged in July (at 15.5%, but a small downside surprise nevertheless). Some commentators pointed out that the sequential momentum in Poland’s core inflation appears to be easing, and that the central bank might use these developments to keep the policy rate on hold in September – which would be a mistake, in our opinion, as the real policy rate is way too negative (however you measure it).
EM Growth Headwinds
Finally, there are lingering concerns about an H2 growth “cliff” in parts of EM. The latest growth/activity prints in some EM were above consensus – including today’s Q2 GDP releases in the Czech Republic and Mexico – but many economists believe that slowdown is already underway in many countries (according to high-frequency indicators), with growth dropping below potential in the coming months. These concerns/observations explain why the next batch of activity surveys (Purchasing Managers Indices, or PMIs) will be closely watched. This would be the first set of PMIs for Q3 – so if we see more “contractionary” PMI prints (<50.0), H2 growth forecasts might be cut even further. Have a great weekend and stay tuned!
Chart at a Glance: How Much Room Left for Rate Hikes in EM?
Source: Bloomberg LP
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