Trend still towards looser monetary policy

The overall trend in EMs has remained towards looser monetary policy in recent months, with more EM central banks cutting interest rates than hiking them. But significant divergences exist at a country level. The central banks that are loosening policy are mainly EM commodity producers. This includes most of Latin America but also Russia. In these EMs, the stabilisation of currencies over the past year is now causing sharp falls in inflation and we expect further policy loosening in the months ahead. However, set against this, a handful of EM central banks remain in tightening mode. This includes Mexico, Argentina and Turkey, where the common theme is that weaker currencies have caused inflation to rise. And, just to complicate the picture further, with inflation under control and the growth outlook gradually improving most central banks in Asia and Central Europe appear content to leave policy settings unchanged for the time being. Perhaps the one point to take from this divergent story is that there is still no evidence that the prospect of Fed tightening – either through higher interest rates or a reduction in the size of its balance sheet – is provoking a strong response by policymakers in the emerging world.