181224 turkey
Expectations for Turkish inflation ticked higher in a recent survey by the Central Bank of the Republic of Turkey. Data from other leading emerging markets such as Russia, Brazil and India too are pointing to the beginning of a tightening interest rate cycle. Image Credit: AFP

Dubai: As emerging markets evidently respond to the COVID-19 crisis more efficiently than the rest of the world, economists evaluate whether these countries will be the first to hike interest rates.

Analysts are widely of the opinion that emerging markets have weathered the COVID-19 storm more efficiently than their developed counterparts, and are in for a stellar 2021, as developed markets continue to hit bumps along the road to recovery.

Research show that countries across Latin America and Asia in particular weathered the storm much earlier, and are now cruising along a much smoother road.

Does this mean more rate hikes?

In emerging markets the only way for interest rates to go may be up, and that’s the message analysts believe market investors are bracing to hear from several central banks over the coming weeks and months.

Most have faced rising inflation pressures for some time but now they are also confronted by higher US Treasury yields, which raise borrowing costs. For oil importers, Brent crude prices above $70 is an added problem - all this while economies are still reeling from the coronavirus impact.

Central banks in Brazil and Turkey are meeting next week and are most likely to raise rates. Markets will also find out on Thursday if Indonesia’s rate-cutting cycle has come to an end. Egypt meanwhile is seen holding rates on Thursday even in the face of rising commodity prices and inflation nudging higher.

Turkey and Brazil to hike rates

“Recent currency falls and rises in inflation have all but guaranteed interest rate hikes in Turkey and Brazil next week, and Russia’s central bank is likely to lay the groundwork for tightening too,” noted London-based Capital Economics’ Shilan Shah, senior India economist based out of Singapore.

“More broadly however, low inflation and still-large output gaps mean that most emerging market (EM) central banks are not under pressure to raise rates for a long while yet.”

After a stunning selloff in US Treasuries took benchmark 10-year yields above 1.6 per cent, the highest in a year, the March 16-17 US Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation.

Rising yields pose a risk to some

“The rise in US Treasury yields poses a risk for those EMs with large external financing needs such as Turkey as well as some smaller frontier markets, and could force central banks in these countries to tighten monetary policy,” wrote William Jackson, Capital Economics’ chief emerging markets economist.

“The accompanying rise in emerging market local currency government bond yields would, if sustained, make debt dynamics in South Africa and Brazil even more worrying.”

Developing-nation local-currency bonds had their worst week since September in the five days through Friday, while dollar debt slipped by the most since January as surging inflation expectations fueled a rout in Treasuries.

Bond market sell-off induces flux

The selloff in the world’s largest bond market also sent implied volatility for currencies and stocks to the biggest weekly increase this year. Even so, exchange-traded fund investors looked past the increase in US yields last week and continued to pour money into emerging markets.

“While further market turmoil is a risk over the coming quarters, the likelihood of outright banking, sovereign debt and currency crises among the large emerging markets is low,” Jackson added. “More acute vulnerabilities lie in some of the smaller frontier markets.”

Like bond yields elsewhere in the world, Indian bond yields have too been surging, tracking a rise in US Treasury yields. Bond yields have seen an upward bias as investor appetite has been low despite the Reserve Bank of India’s (RBI) assurance that it would provide ample liquidity.

Will India be next to hike rates?

“Financial markets appear increasingly convinced that the RBI is on the cusp of monetary tightening,” evaluated Darren Aw, Asia economist at Capital Economics.

“But India isn’t as vulnerable to a sudden drop in capital flows as it was back then and, with the output gap likely to remain significant even as the economy recovers, the RBI is unlikely to consider tightening any time soon.”