Interest rate rises by major emerging market central banks outstripped rate cuts for the third straight month in July as policymakers tightened credit to offset inflation risks and currency weakness amid trade fears and a resurgent U.S. dollar.
Emerging central banks have now recorded the longest monthly run of net interest rate hikes since 2010, calculations by Reuters show. June numbers showed the biggest tilt toward monetary tightening in seven years, with Turkey, Mexico, India, Indonesia and the Philippines among central banks tightening policy.
The graphic below, based on a group of 38 emerging economies, shows the monthly balance between the number of emerging market central banks hiking versus those cutting their policy rates since the financial crisis of 2008.
A positive reading indicates that more central banks in the group raised their policy rate over that particular month compared with those that lowered it.
Struggling with plunging currencies, Turkey and Argentina have been the starkest examples, jacking up their benchmark interest rates in emergency moves.
But a build-up of inflationary pressures more widely will result in monetary tightening across large parts of the emerging markets, analysts at Capital Economics predict.
Citi’s Inflation Surprise Index Emerging Markets touched its highest level in over a year in July at 2.7. A positive reading suggests that inflation has on average been higher than expected.
Emerging market currencies have come under increasing pressure from the dollar’s relentless rise since the start of 2018.
The dollar has strengthened 1.4 percent against a basket of currencies of its major trading partners such as the European Union, Canada and Japan since the start of the year. But looking at the dollar against other important trading partners — a group of 19 of emerging markets including China, Brazil, Mexico, South Africa and Russia — the greenback strengthened more than 5.2 percent over the same period.
There are some likely exceptions among central banks.
Faced with rising inflation Russia has paused its rate cutting cycle for now, but a Reuters poll predicts the central bank will reduce rates again in early 2019.
Quickening inflation and slowing growth have prevented South African policymakers from extending their rate-cutting cycle, but Capital Economics predicts they could deliver more cuts in the coming 12-18 months.