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Opinion
Nicholas Spiro
Nicholas Spiro

Macroscope | Emerging markets can’t afford to wait on US Federal Reserve inflation signals

  • While the US central bank tries to tamp down fears of sudden rate increases, many developing economies have started tightening their policies
  • Vulnerable emerging markets such as Brazil have little choice but to tighten policy to help stabilise markets, even if it puts their recovery at risk

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A farm worker at the Jacarei Reservoir, near Joanopolis, Brazil, on June 13. In Brazil, forecasts for consumer prices are being revised upwards, not downwards. Part of the problem is that a once-in-a-century drought has pushed up electricity prices – something that is beyond the control of central banks. Photo: Bloomberg
Nicholas Spiro
In financial markets, the question on every investor’s lips these days is when the US Federal Reserve will start dialling back, or tapering, its US$120 billion monthly asset purchase programme aimed at cushioning the economic blow from the Covid-19 pandemic.

At the end of its policy meeting on Wednesday, the Fed offered few clues on when it will unwind its bond-buying scheme. While America’s central bank expects to start raising interest rates in 2023, it is under pressure to begin the process of curtailing its asset purchases, given the faster-than-expected rise in inflation, which could prove longer-lasting than many assume.

Yet, as investors await a decision, a growing number of developing economies have already begun to tighten policy. The shift towards less-accommodative financial conditions began in earnest in China when policymakers took advantage of last year’s swift recovery from the shock of the pandemic to revive the deleveraging campaign.
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Beijing’s renewed determination to reduce risks in the financial system has accelerated since the end of 2020, with a gradual scaling back of fiscal support and a reduction in the amount of cash in the banking system. The tightening in liquidity has spooked stock markets and driven up interbank lending rates.

Part of the reason China lost control of the post-pandemic narrative in markets is because of fears it might be tightening policy too sharply. However, in comparison with the stance of monetary policy in some of the other leading emerging markets, China’s central bank is distinctly dovish.

Since March, Brazil’s central bank has raised its benchmark rate by 2.25 percentage points in an effort to curb a steep rise in inflation. That rise reached 8.1 per cent year on year last month, its highest level in five years.

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