EM central banks unfazed by strong dollar

There is no evidence that concerns about rising US interest rates and a strong dollar are forcing EM central banks to tighten policy – indeed, our diffusion index shows that more EM central banks have lowered interest rates than have raised them in recent months. Admittedly, central banks in Turkey and Mexico – where currencies have come under pressure since the turn of the year – have been forced to hike interest rates this month. But these are the exception rather than the rule. In most EMs, currencies have been more resilient and central banks remain focussed on domestic developments. In Latin America (excluding Mexico), last year’s spike in inflation is starting to unwind and policymakers are shifting into easing mode. All told, we think interest rate cuts are likely to outnumber rate hikes in the emerging world over the rest of this year.