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Wednesday, 21 April 2021

Shifting gears

Emerging market central banks waving goodbye to their easing cycles? Policymakers across 37 emerging markets delivered five net interest rate hikes in March, Reuters reports. Last month, the central banks of Ukraine, Georgia, Brazil, Turkey and Russia all decided to raise interest rates, with “many delivering bigger hikes than expected,” the newswire says.

This is a departure from a record easing run: The shift in gears signals a switch in direction from the monetary easing cycle that had gripped EMs since February 2019, when rising inflation necessitated rate cuts. According to Reuters calculations, “the tally between rate cuts and hikes across the group of 37 … has been negative or zero since February 2019,” making the past 24 months the “longest easing cycle” we’ve seen since the EUR crisis in 2010 or the global financial meltdown in 2008.

And the tightening is expected to continue: Rising inflation, fueled by spiraling global energy prices, “combined with stronger demand-side pressure on prices — and in some cases, weaker currencies” are all putting pressure on EM policymakers to move towards monetary tightening and abandon their “currently record-low interest rates,” S&P Global said in a recent report (pdf). There’s also the matter of rising US treasury yields, which could be “challenging” for some EMs to adjust to, particularly “those whose external and fiscal imbalances worsened recently,” including South Africa, Brazil, and Turkey. The report suggests that several Latin American countries will begin to tighten their monetary policies this year, while EM Asia is broadly expected to keep rates on hold in 2021.

Reminder: The Central Bank of Egypt’s (CBE) Monetary Policy Committee meets a week from tomorrow to review rates here at home. But if conventional wisdom holds up, there’s pretty much no chance the CBE will decide to hike interest rates again after pushing through its monetary easing cycle for the last several months. While Egypt’s inflation rate also cooled off significantly, stubbornly remaining below the CBE’s 9% (+/- 3%) target range last year, the CBE has since updated its target range to 7% (+/- 2%), and analysts we’ve spoken with have broadly been expecting the CBE to keep rates exactly where they are until at least the back half of the year.

Stay tuned: We’ll have our customary poll of economists and analysts in the first edition of EnterpriseAM next week.

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