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For most central banks in emerging markets, the only way is to go up

By on July 21, 2021 0

LONDON, July 21 (Reuters) – While major central banks such as the Federal Reserve, the ECB and the Bank of Japan may sit idly by in the face of rising inflation, many of their counterparts in major developing economies take no risk.

Brazil and Russia have already raised interest rates three times this year. China was in tightening mode until an oscillation this month, while Mexico, the Czech Republic and Hungary have all taken their first steps in years. And it looks like it’s just the start. Read more

Despite this week’s global market squalls, a daily financial price reading by JPMorgan shows that the top 18 emerging markets are expected to generate the equivalent of 73 standard-sized 25 basis point interest rate hikes over the past 12 months, and just over 100 in the next two years.

So where are the biggest moves likely to be? How long can these hiking cycles last? And who are the outliers?


Russia has already made three treks this year. But with inflation at its highest level in five years, the central bank is expected to raise interest rates by an additional 100 basis points on Friday to 6.50% (RUCBIR = ECI).

Will it stop there? Bank of America and Oxford Economics think so, but JPMorgan estimates it will rise to 7% while Capital Economics forecasts 7.25% before the end of the year.


A survey of more than 100 economists by Brazil’s central bank on Monday predicted that its benchmark rate of 4.25% would rise to 6.75% by the end of the year.

Most economists believe another hike of at least 75 basis points on August 4 is likely, but 12-month market prices show increases of around 370 basis points, which would leave them near 8 % – that’s a far cry from the 2% they got was no later than March. Read more


Mexico took economists by surprise last month when it made its first rate hike since 2018. The consensus is that it will raise them another 125 basis points by the end of the year and 175 basis points around the same time next year, although UBS believes forward rate agreements (FRA) are priced up to 200 bps. Read more


The Chinese big beast had gradually tightened monetary policy until some wobbly economic data triggered a reversal this month in the form of a reduction in bank reserve requirements. Read more

JPMorgan’s price charts still show a fractional tightening of 14 basis points over the next year, but that’s half of what it was in early May.


One of the puzzles of the pandemic has been consumer price inflation in India, which has hovered around 6% since the crisis began 18 months ago.

It’s a big importer of oil, so the sharp rise in crude prices over the past year will keep the pressure on. Economists don’t expect action to be taken to normalize central bank policy – i.e. narrowing the policy corridor by raising the repo rate – anytime soon. But its price is set for the beginning of next year with the equivalent of seven increases of 25 basis points then over two years.


According to UBS, markets were anticipating up to five South African rate hikes in the next 12 months before protests erupted last week. The central bank will likely remain on hold on Thursday but may well prepare the markets for a rise in September and potentially another in November.


Hungary and the Czech Republic are leading the charge for Eastern Europe after both running a day apart in June. Read more

JPMorgan sees Czechs hiking again in September and November, as well as an outdoor chance of a surprise in August. Hungary is expected to repeat the 30 basis point hike from June next week and add further 15 basis point increments in September and December. Poland is the lagardist.

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South Korea could become the first Asian economy to grow next month with rising inflation and concerns about the overheating real estate market and household debt stress.

Colombia is second behind Brazil in terms of market prices for future hikes, although protests, poor data and the loss of two investment ratings in quick succession mean the take-off may not happen until September.

We see Chile raising its rates from 0.5% to 2% by the end of the year. Kazakhstan’s 9% inflation is also expected to see it shift, while Ukraine, which has already risen twice this year, has analysts at 9.5% inflation at BlueBay.


The new waves of COVID will likely keep other Asian countries such as Indonesia, Malaysia, the Philippines and Thailand on hold.

Pressure from President Tayyip Erdogan means Turkey is the only emerging heavyweight market priced to make a significant downsizing over the next 12 months. Still, the 100 basis point drop in JPMorgan’s market data would only drop it to 18% – still the highest rate of any size global economy.

Additional graphics by Saikat Chatterjee and Karin Strohecker; Editing by Andrew Heavens

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