Emerging market (EM) central banks will have to wait longer to loosen policy as developed markets (DMs) prioritise tackling inflation with further hikes. This will put pressure on central banks that pivoted too early, especially as the pace of disinflation in core measures slowed across major EMs.
Emerging market central banks are in a precarious position. The global economy and underlying inflation have proved more resilient, motivating developed market central banks to continue to hike.
However, financial markets remain on edge following the collapse of Silicon Valley Bank (SVB), which is tightening EM financial conditions and limiting the room for manoeuvre.
This means some EM central banks will have to tighten further, while others will have to wait longer before easing. Those whose pivots already had low credibility are likely to face increased pressure to reverse course.
In a tougher financial market backdrop, EM core inflation has proved sticky. Headline inflation has broadly peaked and will fall further due to energy base effects, but underlying inflation will remain uncomfortably high in many countries, especially those in central and eastern Europe (CEE).
The onset of the DM recession will eventually usher in a pan-EM easing cycle, but a marked worsening of risk sentiment at the onset of the US recession will limit the ability of most EMs to ease conclusively. Those with large current account deficits will face the greatest pressure, but should still avoid balance of payments crises.
Once the Fed has eased monetary conditions and market pressures abate, we expect the pan-EM cutting cycle to commence in early 2024.