Emerging market economies face higher interest rates as inflation rises

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Emerging market economies may have more difficulty refinancing their debt as countries seek to raise interest rates to cope with higher inflation, the Institute of International Finance said.

The central banks of most of the major emerging markets – with the exception of Brazil, Russia, Turkey and Ukraine – have yet to raise interest rates even though the rhetoric has become more hawkish in recent months, the Washington-based institute said in a report by its deputy director. economist Elina Ribakova and economist Benjamin Hilgenstock.

“Yet a review of a larger EM and FM (frontier market) universe of 40 central banks targeting inflation shows that the upward cycle clearly began in Q1 and Q2 2021,” he said. declared.

Globally, central banks and governments have injected $ 25 trillion into economies to cushion the impact of the pandemic and protect businesses and industries. This flow of money has raised concerns in the United States and Europe about rising inflation. Soaring oil prices are also impacting manufacturing and transportation costs, the IIR said.

“Historically low inflation in emerging markets and financial markets enabled supportive monetary policies during the pandemic, which, through lower yields, helped finance larger deficits. While many economists believe that higher debt accumulation is justified in developed markets due to unusually low rates, we believe the argument in the case of emerging and financial markets is more nuanced.

In Central and Eastern Europe, April’s inflation figures point to increasing price pressures in the Czech Republic, Hungary, Poland and Romania which, if sustained, will likely force the hand of policymakers. monetary policy earlier than expected by the market, the IIR said.

In Russia and Ukraine, the IIR expects further increases as inflation is expected to stay above targets, while the South African SARB is expected to maintain its accommodative policy as inflation remains subdued.

“In Turkey, we expect a lagged effect of a weaker pound to keep inflation at high levels, leaving the CBRT with little choice but to postpone easing into the fourth quarter.”

In the ASEAN (Association of Southeast Asian Nations) countries, accommodative monetary policies will remain in place as inflationary pressures are moderate, except in the Philippines, he added.

Indonesia’s central bank eased monetary policy in February and has kept rates unchanged since, while in India the RBI will likely continue its accommodative stance due to internal pressures from Covid1-9.

India, Asia’s third-largest economy, has recorded a large number of coronavirus cases in the past two months. However, infection rates have declined over the past two weeks due to movement restrictions introduced in a number of states.

In Latin America, soaring commodity prices fueled inflationary pressures despite negative output gaps, reducing the possibility of maintaining accommodative monetary policies, the IIR said in the report. In addition, relative price changes due to changes in consumer behavior and base effects induced by the pandemic have made the dynamics of inflation more difficult.

“We expect the BCB (Brazil Central Bank) to tighten its policy further in the coming months to contain above target inflation and anchor expectations.”

In Mexico, higher-than-expected inflation due to supply shocks, pressure on agricultural and energy prices and the reduced economic slowdown prompted Banxico to suspend its easing.

“Rising inflationary pressures have prompted a number of central banks in emerging markets and financial markets to tighten their monetary policy conditions,” he said.

“While the cost of financing in local currency remains relatively low in historical comparison, some countries are more prone to shocks. Among the main emerging countries, we are particularly concerned about Brazil and South Africa – due to large budget deficits – as well as Turkey. “

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