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Rising Rates, Rising Costs?

May 17, 2022

Read Time 2 MIN


Rising food prices might lead to longer “marathon” hiking cycles in EM. But what are the likely costs?

Global Food Prices And Emerging Markets 

India’s decision to ban all wheat exports with immediate effect over the weekend drew attention to several issues. First, the ban takes place against the backdrop of global food prices hitting multi-year highs (see chart below) and inflation in parts of emerging markets (EM) moving into double-digit territory. Further, there is evidence that these kinds of global shocks are already feeding into core prices (including services), which requires continuing policy responses. A big question here is if this is indeed a policy “marathon”, would it be more appropriate to proceed at a slower pace of rate hikes? Some central banks in EMEA and LATAM seem to think so. On the other hand, the latest policy moves in EM Asia (India and Malaysia) show more urgency and signal more rate hikes’ frontloading than the market was expecting earlier this year. India’s central bank minutes will be released tomorrow, and we hope they will shed more light on this subject.

Rate Hikes And Fiscal Implications 

Second, “marathon” tightening cycles inevitably lead to concerns about the fiscal impact of higher interest rates, including “technical” issues like larger debt issuance. This might not be a huge problem for countries with deep domestic financial markets (like South Africa, for example), but it poses risks for less developed markets - especially as non-resident money continues to leave. The sell side research shows that portfolio outflows from EM since the beginning of March are comparable to those during the global financial crisis of 2008.

Food Prices And Social Risks  

Finally, rising food prices reinforce concerns about social and political implications in lower-income countries (Arab Spring 2.0). The IMF is talking to several governments right now, but the fund’s support is conditional upon meeting certain targets, including structural. Some countries - like Egypt - are making more progress than the others. The Egyptian central bank is also expected to deliver another rate hike on May 19 to cap rising prices. However, the situation in Sri Lanka is getting more and more challenging. Will the appointment of new Prime Minister be a game-changer? Stay tuned!

Chart at a Glance: Food Prices - No Peak in Sight?

Chart at a Glance: Food Prices - No Peak in Sight?

Source: Bloomberg LP

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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