BENGALURU- Most emerging market central banks will resist pressure to cut interest rates in coming months, according to Reuters polls which also showed economists forecasting they would do a better job at taming inflation than their developed market peers.
Inflation in most emerging market economies over the past few years has not been as high, partly due to comparatively less aggressive stimulus in response to the COVID pandemic.
Relatively milder inflation has allowed nine of 14 EM central banks covered by Reuters polls in the latest quarterly global economic outlook to pause their comparatively-modest interest rate tightening cycles.
Of the remaining five, the central banks of Turkey, Nigeria and Thailand were expected to raise rates again. The People’s Bank of China and the State Bank of Vietnam were forecast to cut rates further.
Thanks to better economic prospects and a weaker dollar, emerging market portfolios attracted net inflows of over $22 billion in June, the highest since January, after inflows dropped more than 90 percent last year.
As the US Federal Reserve nears the end of its tightening cycle, keeping higher rates would also help EM currencies build on recent gains against the US dollar as interest rate gaps stop widening.
Over 70 percent of EM central banks, 10 of 14, were forecast to track the Fed and not cut rates this year.
Along with the central banks of China and Vietnam, those in Brazil and Mexico were expected to cut this year. Both Latam central banks began raising rates long before the Fed.
“We think a hawkish Fed may drive EM central banks to push out rate cuts, though we think hikes are unlikely across the regions,” noted analysts at Barclays.
“Even as the disinflation trend sets in, we note most EM central banks are unlikely to let their guard down against inflation soon, especially as risks of food inflation arise again.”
Among 11 emerging market central banks surveyed with an inflation target, six were expected to hit or keep it below target by end-2023.
