EM tightening cycles have continued apace but, having started raising rates much earlier than their DM (and Asian) peers, some central banks in Latin America (Brazil, Chile) and Emerging Europe (Czech Republic, Poland) are drawing their hiking cycles to a close. There are, however, significant risks. In particular, a period of intense currency weakness could force these central banks to raise rates further – Hungary is a case in point. And even if central banks aren’t forced to react to currency weakness, the big picture is that interest rates in Emerging Europe and Latin America are set to stay high – and in many cases above neutral – for longer than the consensus expects. After all, while headline inflation rates are set to drop back, they are likely to exceed central bank targets for several more quarters.
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