Because the central banks of Poland, Hungary and Chile will cut rates
Emerging market central banks are ready to ease monetary policy. The analysis of Lupine Rahman, Head of EM Sovereign Credit at PIMCO
Breaking with the typical pattern, several emerging market central banks are in the process of cutting rates just as major developed market central banks are nearing peaks. Latin America will probably be at the forefront, starting with Chile's central bank, which according to our forecasts will cut its key rate by 75 basis points to 10.50% on Friday. Brazil will likely follow next week with a 50 basis point cut to 13.25% and Peru later in the month with a 50 basis point cut to 7.25%. We expect Colombia and Mexico to join the dovish in October and November, respectively.
Beyond Latin America, the outlook is more mixed. Hungary has already cut its one-day deposit rate, reversing some of the emergency hikes it enacted last year. Poland will likely start its easing cycle in September with a 25 basis point cut to 6.50%. We expect South Africa to pause at 8.25% before moving into cuts later in the year, while the Czech Republic is likely to remain at 7% for the remainder of the year. Emerging Asia lags behind the emerging cycle due to slightly asynchronous business cycles and less dramatic inflation spikes.
Emerging central banks take the lead
In the past, when the US sneezed, emerging markets caught a cold, referring to the significant impact Federal Reserve cycles have often had on emerging economies. Here are several reasons that differentiate this cycle, with EM central banks being the first to move into an easing cycle:
Most emerging market central banks fronted the curve at the start of this cycle, raising rates early and rapidly before developed central banks tightened.
Inflation broadly peaked in emerging markets faster than in developed markets, as base effects, falling commodity prices and strengthening currencies led to stronger-than-expected disinflation in both inflation and overall than in underlying inflation. Outside of emerging markets, US and global inflation may have peaked but remains well above central bank targets.
Financing conditions for emerging markets are tight overall: most real rates are well above the neutral threshold, while in most highly liquid emerging markets, the financial impact of rising global rates has been limited.
A gradual progression
That said, we do not expect an aggressive EM easing cycle. Central banks will likely cut gradually, mindful of the performance of their currencies and wary of disrupting the carry trades that have fueled the US soft landing narrative (although PIMCO believes a US recession is more likely than not).
Any hawkish turn in the Fed's trajectory, an increase in global risk factors or the emergence of US exceptionalism affecting the dollar could push emerging central banks into an even more cautious path than the one priced into their curves. Unless these factors play out, we expect rate cuts in emerging markets to proceed as market expectations, gaining momentum towards neutral rates as the path for rates in developed markets becomes clearer, and eventually moving towards cuts more calibrated towards the end of their cycle.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/banche-centrali-paesi-emergenti-taglio-tassi/ on Sun, 30 Jul 2023 05:24:17 +0000.