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Asia joins the EM rate hike club

Upside surprises to inflation coupled with a hawkish Fed have prompted aggressive monetary policy responses by central banks across the emerging world over the past month. Policymakers in Czechia, Romania, Chile and Egypt raised interest rates by more than expected while Mexico’s central bank appears to be shifting its tightening cycle into a higher gear. Meanwhile, a handful of Asian central banks kicked off their tightening cycles, with India, Malaysia and the Philippines raising interest rates. Looking ahead, we think tightening cycles in Emerging Europe and Latin America have a bit further to run, while policy normalisation in Asia is likely to be gradual. The key exception is China where policy is likely to be loosened a bit further, although a renewed round of large-scale stimulus seems off the cards. LatAm Drop-In (26th May, 10:00 ET/15:00 BST): Join our 20-minute briefing about Colombia’s election and other regional political and fiscal risks – including Lula vs Bolsonaro in October. Register here.
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Emerging Markets Economics Update

A closer look at the surge in EM food inflation

Aggregate EM food inflation has risen to its highest rate since 2008 and, while it should fall back in 2023, it’s likely to stay extremely high for at least the next four-to-six months. That will keep consumer spending under pressure and provide another reason for EM central banks to tighten monetary policy further. Asia Drop-In (30th June, 09:00 BST/16:00 SGT): Are Asia’s central banks behind the curve? Can the Bank of Japan and People’s Bank of China continue to go against the grain? Find out in our special session on what global monetary tightening looks like in Asia. Register now.  

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A handful of EM central banks have ramped up FX sales to provide support to weakening currencies over the past couple of months. And with inflation high and the US dollar likely to strengthen further, others could follow suit. FX intervention is unlikely to prevent further depreciation, but central banks with healthy FX reserve buffers may have some success in slowing the pace of currency falls. In view of the wider interest, we are also sending this Emerging Markets Overview Update to clients of our FX service.

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High inflation to keep central banks in tightening mode

Having surged in recent months, there are some tentative signs that EM inflation is nearing a peak. Our measure of aggregate EM inflation was steady at 7.0% y/y between April and May and some indicators of pipeline price pressures have eased. But even so, our aggregate measure is running at its highest rate since 2008 and, even when inflation does fall back, it’s likely to remain well above many EM central banks’ targets for some time. Against this backdrop, most EM central banks are likely to tighten monetary conditions further. Indeed, we generally expect more rate interest rate hikes than most analysts do over the next 12-18 months. Asia Drop-In (30th June, 09:00 BST/16:00 SGT): Are Asia’s central banks behind the curve? Can the Bank of Japan and People’s Bank of China continue to go against the grain? Find out in our special session on what global monetary tightening looks like in Asia. Register now.  

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Growth to underwhelm as inflation surges

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Spillovers from war in Ukraine intensifying

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War in Ukraine to drag on EM GDP growth

The war in Ukraine will have several economic repercussions for the emerging world. We have lowered our aggregate EM GDP growth forecast for 2022 by 1%-pt, to 3.2%. Russia aside, the biggest downward revisions have been to other Emerging European economies. At the other end of the scale, the jump in commodity prices will boost growth in the oil producers across the Gulf, as well as Colombia. High oil prices will also push up EM inflation over the coming months. With inflation already far above target, policymakers in Latin America and Emerging Europe are likely respond with further (large) interest rate hikes. Meanwhile, external positions in many EMs are likely worsen. This is of particular concern for Chile and Romania where current account deficits are already large, but risks are building in Thailand, India, Poland, Hungary and Peru too. Commodities Drop-In (24 March, 11:00 EDT/15:00 GMT): Our Commodities team will be exploring how the war in Ukraine is shaking up commodity markets, from oil to wheat, while tackling some of the big market questions – not least whether we’re in for 1970s-style oil supply shocks. Register here.

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