Vertigo 3D
Some emerging market central banks have paused interest rate cuts due to inflation concerns, and policymakers in developed markets may also find themselves forced to stick with higher interest rates for longer, the BlackRock Investment Institute said.
Brazil, Mexico and Poland are among the Emerging markets are the world’s most heavily indebted economies, where policymakers have cut interest rates in the face of slowing inflation and sluggish economic growth. Among developed markets, the Bank of Canada and the European Central Bank have cut rates once this year, and the Bank of England and the Federal Reserve are expected to cut rates in 2024.
But now, emerging-market central banks are heading toward the end of their monetary easing cycles because of various constraints on how much they can cut interest rates, Jean Boivin, president of the International Investment Bank, said in a commentary note on Monday.
“Emerging market central banks cannot afford to cut rates that much further, especially when emerging market central banks — particularly the Fed — are holding rates steady or slowing to cut them,” he said. The divergence in policies against the US dollar could weigh on local currencies and hurt some economies that are sensitive to inflation caused by a weaker currency.
The International Investment Bank said Brazil’s central bank cut its key interest rate to 10.5% from 13.75% but paused in June, citing questions about the impact of easy government fiscal policy on inflation. Poland has left interest rates at 5.75% since October after two rate cuts due to inflation concerns as government measures to protect households from high energy costs end.
“We see both emerging and developed markets facing structural sources of higher inflation post-pandemic, including high public debt and geopolitical tensions that are rewiring supply chains,” Boivin said.
But higher interest rates for longer don’t necessarily mean bad news for risk assets, he said. He pointed, for example, to the rise in U.S. tech giants (COMP:IND)(NDX) and the broader U.S. stock market (SPY)(IVV) to record highs even as bond yields (US2Y)(US10Y) have risen on reduced expectations of a rate cut by the Federal Reserve.
For emerging markets exposure, ETFs include EEM, EDIV, VWO, BRF, FLMX and EPOL.