Global Equities
Capital IdeasTM
Investment insights from Capital Group
Categories
Fixed Income
EM rate cuts on the horizon as inflation trends down
Peter Becker
June 28, 2023
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
Learn more about
Our latest insights
RELATED INSIGHTS
-
-
-
Interest Rates
Hear from our investment team.
Sign up now to get industry-leading insights and timely articles delivered to your inbox.
Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.