Economics: An EM monetary policy tipping point?
EM rate cycles have diverged widely since mid-2021
Some weaker EMs have lost control of their monetary conditions. Meanwhile, rate cycles in some stronger EMs, mostly in Asia, are lagging those of the major DMs. But most EMs hiked rates early in this cycle, often aggressively.
The early hikers are at or near the peak of their rate cycle
Policy rates in the early-hiking countries are now well into restrictive territory, and inflation is expected to ease for most in the near term. The market is now starting to discount rate cuts next year for many of the early movers.
But the scope to cut rates may be limited well into 2023
Food price increases may have kick-started this cycle, but lower grocery bills probably won’t be enough to end it. Inflation expectations are above target in most countries, and global financial conditions are likely to constrain most EM central banks.
