Pivotal of the Fed, inflation spurs rising emerging market interest rates in June

LONDON, July 6 (Reuters) – Emerging markets recorded further interest rate hikes in June as the hawkish backbone of the US Federal Reserve amplified inflationary pressures in a number of developing economies.

Policymakers from a group of 37 emerging market central banks made five net interest rate hikes in June after just one hike in May.

A series of major central banks hiked rates in June, and many signaled an acceleration in the pace of hikes in the coming months.

Brazil recorded its third straight increase of 75 basis points while raising the specter of larger hikes to come as it returns to “neutral” rates, abandoning plans to “partially” normalize its policy. Read more

Russia’s central bank raised key interest rates by 50 basis points to 5.5 percent and said more was needed to contain high inflation, potentially considering a 100 basis point increase in costs of loan in July.

Mexico surprised markets, rising 25 basis points to 4.25% just days after the Fed turned more hawkish.

Policymakers said the move was necessary to avoid negative effects on inflation expectations and cited price formation in the United States, although the bank’s deputy governor suggested there might be a long pause to wait for its northern neighbor to rise. Read more

Hungary and the Czech Republic have become the first countries in the European Union to hike rates in recent years, with the former registering a slightly larger-than-expected rate hike. Read more

Most of June’s hikes came after the Fed began closing the door on its pandemic monetary stimulus on June 16 and surprised markets with an accelerated timeline for interest rate hikes. The hawkish pivot briefly rocked the markets as the dollar index has since gained 2%. Read more

“Mexico, Hungary and the Czech Republic have seen their central banks raise their interest rates,” said Marek Drimal of Societe Generale.

“Countries where central banks have already tightened and are expected to continue, or are expected to start soon, should be somewhat shielded from the impact of higher US interest rates and perhaps a stronger US dollar,” added Drimal.

Armenia has also raised its rates, although it is not in Reuters’ sample.

Uganda, which is also not in the sample group, has proven to be a rare outlier, lowering its benchmark rate to an all-time low in an attempt to boost the flow of cheap credit and stimulate businesses affected by the effects of the COVID-19 pandemic.

For an interactive version of the graph, click here.

The recent shift of emerging market central banks from an easing cycle to an up cycle came after the balance between rate hikes and cuts in the Group of 37, according to Reuters calculations, was negative or zero for two years until February 2021.

It was the longest easing cycle since the financial crisis of 2008 and the euro crisis of 2010.

At the peak of the cycle in March last year, 27 of 37 central banks cut rates, trying to protect their economies as the fallout from the coronavirus pandemic and the lockdowns to contain it trickled through to markets around the world whole.

In 2021, there have been 15 rate hikes in the group so far, compared to four for the whole of 2020 and nine in 2019.

There have only been 3 cuts this year, compared to 115 in 2020 and 81 in 2019.

For an interactive version of the graphic below, click here.

Reporting by Karin Strohecker and Ritvik Carvalho; Editing by Catherine Evans

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