Economics: Will EMs be the first to cut rates?
Could EM central banks be the first to start cutting rates?
Some emerging market central banks hiked rates early and aggressively after food and fuel prices pushed headline inflation higher last year. With food and fuel costs now falling, and rates well into restrictive territory, markets anticipate rate cuts next year.
Three factors may deter EM rate cuts
Inflation may prove sticky, as price rises have moved well beyond food and fuel costs. A US recession and market correction may spark more capital outflows. That may encourage central banks to target external balances at the cost of domestic demand.
Rate cuts are plausible, but perhaps not to the extent being discounted
Rate cuts might not just require inflation expectations to fall back to target. A weaker dollar and a resumption of portfolio inflows may also be needed. The risk seems to be that rates will remain restrictive in Latin America and Eastern Europe next year.