September 28, 2022
  • September 28, 2022

Prices and central banks – under pressure

By on September 10, 2022 0

Increase in prices in DM

The euro’s first “strange” reaction to today’s oversized (and not fully integrated) European Central Bank (ECB) rate hike of 75 basis points started to look more rational once we checked the updated ECB forecast, which shows that European inflation should remain above target until 2024 (see table below). This means that the ECB will have to continue to price hikes – at a steady pace. The market is currently calling for another big move in October (+82bps), followed by +50bps in December. Next up in developed markets (DM) is the US Federal Reserve (Fed) meeting on September 21, and Fed Funds Futures point to a repeat of July’s result with another 75 basis point rate hike.

Emerging market inflation pressures

The latest impressions of inflation in emerging markets (EM) suggest that many central banks are not yet in a position to stop the hike. Hungary the so-called downward inflation surprise was rightly ignored by the market, as headline inflation accelerated to 15.6% yoy in August, while core inflation jumped to 19% (!). The central bank is acting very proactively, but concerns persist on the fiscal side that the pace of post-election adjustment may be too slow. Headline inflation in Mexico surprised on the upside in August (8.7% year-on-year) and annual underlying inflation exceeded 8% – a strong signal that the central bank will raise the key rate by 75 basis points at the end of the month. Chilean prices also rose more than expected last month (14.1% YoY), but the central bank may have room for a more modest hike after a hawkish surprise (+100bps) a few days ago.

Asian Emerging Markets Policy Reaction

Somewhat a better view of inflation in emerging Asia allows regional central banks to act in small steps. Malaysia opted for a measured hike of 25 basis points today – the third in a row – and the consensus expects further tightening (+126 basis points over the next twelve months), although the pace could be affected by the details of the 2023 budget (published before the next rate-setting meeting). Chinese inflation is out tonightand the consensus expectation of continued producer price disinflation and barely changed annual headline inflation should reinforce the policy easing biasas growth prospects continue to weaken (some sell-side analysts have lowered their 2022 growth forecasts below 3%).

Chart at a glance: big changes in the European forecast

Source: Bloomberg LP.

Originally published by VanEck on September 8, 2022.

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