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Capital IdeasTM

Investment insights from Capital Group

Categories
Fixed Income
EM rate cuts on the horizon as inflation trends down
Peter Becker
Investment Director
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

D7_EM-rate-cuts-on-horizon-as-inflation-trends-down_916px

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


Peter Becker is an investment director at Capital Group. He has 27 years of industry experience and has been with Capital Group for five years. Prior to joining Capital, Peter was a managing director in the fixed income product management team at Wellington Management. Before that, he was a portfolio manager at Aberdeen Asset Management. He holds a master's degree from The Ingolstadt School of Management. He also holds the Chartered Financial Analyst® designation. Peter is based in London.

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