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Fixed Income
Peter Becker
After a significant decline in emerging market (EM) headline inflation in the first half of the year, we can expect a more visible slowing of core inflation in the second half.
EM countries have historically struggled with inflation and last year was no exception with higher commodity prices resulting from the Russia/Ukraine conflict (EM countries tend to be more sensitive to commodity prices given the generally higher weight of food and energy in inflation baskets), supply chain issues and weak EM currencies. With the reversal in last year’s surge in food and energy prices, the easing in supply chain bottlenecks and a weaker US dollar, inflation has now slowed in most EM economies. Moreover, after surprising to the upside for much of the past couple of years, inflation surprises have generally now turned negative. This disinflation trend looks set to continue in the second half of the year.
EM central banks have broadly come to the end of their tightening cycles, but they need a few factors in place before they can start cutting rates.
Many EM countries have aggressively hiked policy rates
Chart shows the change in policy rates from 31 December 2020 to 20 June 2023.
Source: Bloomberg
In this piece, we outline how a slow and steady rate cutting environment combined with reasonable EM growth should be positive for EM local currency debt
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