Rise in inflation to prove short-lived

Inflation in many economies in the region has risen to multi-year highs in recent months. In general, this has been driven higher by a combination of unfavourable base effects from the pandemic, as well as some re-opening inflation and the effects of rising global commodity prices. In Oman, those effects have been compounded by the introduction of VAT in April. Most of the drivers appear to be transient and inflation is likely to slow again over 2022-23 and, in Egypt, this is likely to bring interest rate cuts back on to the agenda. One key exception is Lebanon, where inflation is already running at over 100% and will remain elevated amid the effects of the collapse in the pound and the repeal of subsidies.
William Jackson Chief Emerging Markets Economist
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Middle East Economics Weekly

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External headwinds growing

Falling new virus cases and the lifting of restrictions have boosted economies across the region in Q3, but the deteriorating external backdrop will put a lid on growth from here. Even with an orderly resolution to the Evergrande saga, a slowdown in China’s property sector will weigh on Latin American commodity producers, particularly Chile and Peru, over the coming quarters. Meanwhile, weakening US growth is a headwind to exporters, particularly in Mexico. As a result, regardless of developments on the virus and vaccine front, we expect that the regional recovery will slow over the coming quarters.

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Have emerging markets vanquished inflation?

Low inflation is here to stay in much of the emerging world. However, there is a significant risk that inflation rises, albeit moderately, over the medium term in several countries. This risk isn’t limited to the usual suspects like Turkey and Argentina. But it also includes other major emerging economies such as Brazil, South Africa, Indonesia, the Philippines, Colombia and, to a lesser extent, Mexico and India.

27 September 2021

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Brazil IPCA-15 (Sep. 2021)

The increase in Brazilian inflation to 10.1% y/y in the middle of September means that another large hike in the Selic rate at the Copom meeting next month is nailed on (we expect a 100bp hike to 7.25%). And while inflation should start to ease back from October, we think that the tightening cycle will continue with the Selic rate is likely to hit 9.00% by early next year.

24 September 2021
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