EM Hawks – Talons Still Out
29 March 2023
Read Time 2 MIN
Global Disinflation
A concept of “transitory disinflation” is creating some buzz, and we are wondering whether such fears keep emerging markets (EM) central banks on the cautious side, despite obvious progress in disinflation. The mother of all base effects will continue to push inflation down in the coming months, but would this be enough to bring inflation back to targets over the forecast horizons, and, importantly, make sure that inflation stays close to the target for a considerable period of time? Brazil is an important testing ground here – especially against the backdrop of raging fiscal debates. But some smaller “EM Graduates” like the Czech Republic or Thailand – which are closer to DM structurally and institutionally - are in this group as well.
EM Policy Rates
Thailand’s central bank opted for another measured rate hike today (+25bps), and signaled more tightening as the economy continues to rebound. The Czech National Bank stayed on hold, as expected, and Governor Aleš Michl – who was considered a dove until recently – warned the market against “premature” bets on rate cuts, and said that the peak rate might not be behind us yet. Other EM central banks also signal that the bar for easing is high. Core price pressures are often more sticky than headline inflation, inflation expectations sometimes grind higher even when disinflation is well underway, and there is a lot of uncertainty about the global growth outlook. This was today’s message from the Malaysian central bank (“not out of the woods on inflation”), and these are the reasons why central banks in Mexico, Colombia, and South Africa are likely to tighten more this week (albeit at a slower pace) before considering a pause.
Market Turbulence and EM
EM FX certainly does not seem to mind that real rates are high, as this could be a nice safety cushion in times of market turbulence. The chart below shows major EM currencies’ performance against the U.S. Dollar in the past month – we suspect we were not the only ones who was humming R.E.M.’s song “It’s the End of the World as We Know It (And I Feel Fine)” when looking at it. Stay tuned!
Chart at a Glance: EM FX – Crisis? What Crisis?
Source: Bloomberg LP.
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