11 May 2022
VanEck Blogs | Emerging Markets Debt Daily
High Inflation, Higher Rates?

Upside inflation surprises in EM and DM argue in favor of energetic policy tightening. EM Asia is joining the race in earnest with the second surprising policy rate hike in a row.

EMEA Inflation Shocks 

Our research trip to Central Europe continues, and even though U.S. inflation is today’s major (global) attraction, a succession of inflation “bombs” in the region raises a question of why Central European prices are exploding, whereas inflation is “simply” high in other emerging markets (EM). Global shocks are affecting price movements everywhere, but domestic demand in Central Europe was strong to begin with, and for a while it was masked by deflation “imported” from the Eurozone. This factor now acts in the opposite direction, and this begs the question whether regional central banks can bring inflation back to target without the European Central Bank doing some heavy lifting. Personnel changes is an additional complicating factor in some countries – like the Czech Republic. The country’s central bank now has a “dove” at the helm (Ales Michl, who was confirmed this morning). An obvious risk here is a large “goodbye” rate hike from the board’s departing hawks (two are leaving in June) and its subsequent partial reversal if new board members are doves – this might create negative (Turkey-like?) optics.

EM Asia Steps Up Rate Hikes 

It is not just EMEA’s monetary policy space that became more “alive” – the policy rate “levee” in EM Asia has also been breached. India’s surprising inter-meeting rate hike was followed this morning by an unexpected 25bps rate increase in Malaysia. The central bank felt that strong domestic demand justifies the liftoff, albeit the statement emphasized that the pace of tightening will be measured and gradual. These developments add an extra dimension to China’s policy divergence. Today’s upside inflation surprise in China should not restrict room for policy accommodation – annual inflation is still very low (2.1%), but widening rate differentials between China and regional peers can create a buffer against the weakening renminbi.

LATAM Inflation – Too Early to Stop Hikes 

Brazil’s inflation almost looks mild in comparison with Central Europe, but it nevertheless rose a bit more than expected to 12.13% year-on-year – and this is a convincing argument in favor of at least one more (albeit smaller) policy rate hike in the coming months. An upside inflation surprise in the U.S. (8.3% year-on-year) tells us that the U.S. Federal Reserve should continue tightening at a brisk pace (+50bps) despite tentative signs that inflation might be peaking. And this global liquidity withdrawal should (hopefully) make EM central banks’ life a bit easier. Stay tuned!

Chart at a Glance: EMEA Inflation - Scary Sight

Chart at a Glance: EMEA Inflation - Scary Sight

Source: Bloomberg LP


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Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Important Definitions & Disclosures

CZCPYOY - Czech Republic CPI Nominal Change Year-over-Year Index

HUCPIYY - Hungarian Consumer Price Index

POCPIYOY - Poland CPI All Items Year-over-Year Index

ROCOPYOY - Romania CPI Year-over-Year Index