EM Central Bank Roadmap

Many emerging market (EM) economies are also facing near-term inflation shocks, but there has been a wide divergence between how central banks are facing it. Some have reacted by frontloading hikes, while others have stuck to a strategy of talking down inflation risks.

Many emerging market (EM) economies are also facing near-term inflation shocks, but there has been a wide divergence between how central banks are facing it. Some have reacted by frontloading hikes, while others have stuck to a strategy of talking down inflation risks. At this point, we think there is a lot more that can go wrong with the second group, which run the risk of falling behind the curve. As part of our recent series on monetary policy, in this piece we take a snapshot of major central bank in emerging markets and lay out our views on recent developments. Though most central banks around the world are still on hold, we are at or near critical inflexion points, and managing this transition could become very challenging.


The decision by the Brazilian central bank to frontload the tightening cycle could have been the single most import positive policy move for the country’s asset prices this year. It helped turn around the faltering currency, providing another force to contain rising price pressures. It also established an anchor amid chronic uncertainty about the fiscal outlook and the potential impact of pandemic spending on inflation trends. Just this week, headlines suggest that pandemic-related cash transfers could be extended by two months. The context is, of course, lower approval ratings for the president and politicians keeping one eye on next year’s elections. In any case, we think the front-loaded cycle had the desired effect, as seen by the flatter shape of the local yield curve. When coupled with the 13% currency appreciation since late March, it could mean a shorter cycle with an earlier pause. But there’s still a lot more tightening in the pipeline before we can form a firmer view on the local top for SELIC, especially after the latest inflation print.

The economy seems to be getting some traction, and inflation expectations have been trending higher. The 12-month IPCA forecast is at 4.2%, according to the latest Focus survey, and will probably creep higher after the May inflation figure topping 8% y/y. Implied rates six months out are comfortably above 6%, implying several more hikes in the pipeline from the current 3.50%, which we agree. Indeed, a 75 bp hike to 4.25% next week is fully priced in. The local yield curve remains very steep. Despite the recent flattening, we think a meaningful reduction of the risk premium in the back of the curve will only be sustainable if the fiscal situation improves, which we find unlikely.

Chile’s central bank delivered a hawkish hold in this week’s meeting. Rates were kept steady at 0.50%, but the bank said that “the strong dynamism” in the macroeconomic scenario “makes it necessary to recalibrate the expansiveness of monetary policy going forward.” Regarding QE, the period of coupon reinvestment concluded in early June, and the stock will be gradually reduced. The next policy meetings are July 14, August 31, October 13, and December 14. Next month may be too soon while October seems too late, and so we look for the first hike in August. Bloomberg consensus sees 25-50 bp of tightening in H2 that could take the policy rate to 1.0% by year-end, followed by 25 bp per quarter next year, bringing the policy rate to 1.75% by Q3 22. This seems about right to us, but the risk is tilted towards more tightening in light of the potential fallout from the new constitution and uncertainty over the pension fund withdrawal legislation.

Banxico is also well on the way to start tightening. The latest inflation figures for May show CPI still around 6% y/y, even if slightly lower than the previous month’s reading, and core CPI surprised on the upside. Measures of inflation expectations are also elevated, meaning that the risk is for an earlier start to the tightening cycle. We think this month’s meeting is probably a bit premature, but we wouldn’t discard it. Bloomberg consensus sees the first 25 bp hike as likely by Q4 2021. 


Russia’s tightening cycle is well underway and set to continue. The latest inflation figures came in at the high end of expectations at 6.0% y/y, the highest level since mid-2016 and further above the 4% target. Much of the increase came from higher food prices, but other categories such as consumer goods and services also accelerated. We have no doubt that the CBR will hike again this week, but we don’t think the data warrants a more aggressive move beyond the 50 bp already priced in, especially with the ruble on a two-month strengthening trend. However, the higher inflation numbers and other solid data suggest that the cycle will likely go on for a few more meetings to at least 6.0% from 5.0% currently, in our view.

Central banks of Hungary and the Czech Republic have just about confirmed that tightening is imminent, while Poland is sending tightening signals. The latest statement by the National Bank of Hungary stated they are “ready to tighten monetary conditions in a proactive manner,” which probably means that the odds of a hike at the June 22 meeting are very high. This is consistent with last week’s comments by Deputy Governor Virag signaling that the first rate hike since 2011 is near. Meanwhile, the Czech central bank Governor Rusnok is debating whether to deliver the first hike in June or August. Indeed, inflation continues to rise, and the labor market remains tight. Recent data has been mixed (stronger manufacturing PMI vs. weaker retail sales), but we think the strong performance of the koruna against the euro will nudge them to start this month. Bloomberg consensus sees a year-end rate of 0.75%, rising to 1.25% by Q3 22. The National Bank of Poland is likely to take longer to move, as confirmed by this week’s dovish hold. Most MPC members and Governor Glapinski still seem to be holding on to their dovish positions, even though the hawks are becoming louder and the economy is gaining traction. Bloomberg consensus sees the Polish policy rate steady at 0.10% until Q2 2022, when the tightening cycle is expected to begin.

The South African Reserve Bank (SARB) probably sounds more hawkish than it really will be. While keeping rates unchanged at 3.50% in the last meeting, the bank cited several potential inflationary factors and kept to the model guidance of two 25 bp hike this year. While not impossible, we doubt that SARB will find enough arguments to tighten so soon, especially with the deflationary force of the strong currency appreciation over the last few months. The country still suffers from chronic unemployment, and we still can’t see a strong argument for an accelerated recovery that would propel core inflation beyond the SARB’s comfort zone. Bloomberg consensus sees steady rates through year-end, with the first 25 bp hike priced in by Q1 22 and another 25 bp in Q2 22.


PBOC Governor Yi Gang reaffirmed that the current level of accommodation is appropriate, and the immediate policy focus seems to be on commodity market speculation and FX policy. The bank now expects CPI inflation to fall below 2% this year, compared to the official target of about 3%. This confirms that we won’t get the signal for rate hikes anytime soon. Indeed, China’s latest aggregate financing data came in mixed, showing a pickup in government bond issuance (likely infrastructure related) along with a decline in corporate borrowing. Again, nothing to suggest a need for policy change and consistent with recent stories of the PBOC asking lenders to curtail loan growth. Further steps towards tightening should come only later in the year, and at a slow and cautious pace. For now, official will focus on containing speculation in the commodity markets and managing FX risks. The PBOC recently increased the foreign currency RRR by 2 ppts to 7%, locking up more FX in the central bank and hampering banks’ abilities to extend FX loans.

The Bank of Korea delivered a hawkish hold in its last policy meeting. Rates were kept at 0.5%, but Governor Lee said the bank is preparing for an “orderly” exit from its record-low interest rate at some point as the economy recovers. To emphasize his point, the BOK made a substantial upward revision to its growth forecasts. GDP is expected to grow 4% this year, up from 3% in the February forecast. Next year’s forecast was boosted as well, mainly on improved external demand. The 2021 inflation forecast was revised higher by 0.5 ppts to 1.8%. Markets assume the bank will start hiking sometime next year. We agree and don’t think they will be in too much of a hurry. Indeed, Governor Lee made it clear that policy will remain accommodative “for a while.” Bloomberg consensus sees steady rates through Q3, with small odds of a hike in Q4 that rises as we move into 2022.

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