EM Inflation Waves – Mind the Region!

02 August 2022

Read Time 2 MIN



Inflation surprises in EMEA/LATAM are heading south – a signal that peak hawkishness might be behind us and that central banks will focus more on growth headwinds going forward.

EM Inflation Pressures

The latest data releases in emerging markets (EM) Asia confirmed that peak inflation in the region remains elusive. Indonesia’s inflation surprised to the upside in July, accelerating to 4.94% year-on-year, and even though South Korea’s headline inflation was in line with expectations, it rose to 6.3% year-on-year. South Korean inflation is now 3 standard deviations higher than the 5-year trend, and this puts extra pressure on the central bank to keep on tightening beyond July’s 50bps policy rate hike (the market currently prices in additional 33bps in the next three months). Indonesia’s central bank had resisted policy normalization via rate hikes so far – playing with the reserve requirements for banks instead – but the Bloomberg consensus now sees a liftoff in Q3. 

EM Peak Rates

Unlike EM Asia, inflation surprises in EMEA and LATAM are actually heading south (see chart below) – together with actual annual inflation in some countries. This includes the July print in Peru (eased to 8.74% year-on-year), and bi-weekly inflation in Brazil (eased to 11.39% year-on-year). Poland’s July inflation was stable for a change (still sky-high though at 15.5% year-on-year). This does not mean that tightening cycles will be cut short, but it does suggest that peak hawkishness in EMEA/LATAM might be behind us and that central banks will focus more on growth headwinds going forward.

Pace of Tightening In EM

There will be several important test-cases – in all EM regions – in the next few days. India’s central bank meets on August 5 – the consensus sees a smaller hike (+38bps), following two larger moves (one of which was off-cycle) and measures to boost capital inflows. A 40-50bps hike would be a huge hawkish surprise. Brazil is expected to deliver another 50bps bps hike tomorrow, and then finalize the current cycle with a smaller 25bps hike in September. Finally, the Czech National Bank is meeting on Thursday – the consensus sees a small “conciliatory” hike (25bps), as a gesture not to scare the market after the dovish makeover of the board (the departing hawks “slammed the door” with a sizable “goodbye” rate hike). Stay tuned!

Chart at a Glance: Upside Inflation Surprises in EM Finally Fizzle Out – But Not Everywhere*

Chart at a Glance: Upside Inflation Surprises in EM Finally Fizzle Out – But Not Everywhere*

Source: Bloomberg LP


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*Citigroup Inflation Surprise Index (CISI), tracks whether a core set of inflationary data series has been coming in under expectations, at expectations, or over expectations.