Doha: ‘Reflation’ has been the name of the game for the global economy since policymakers reacted aggressively to the unprecedented shock of the Covid-19 pandemic. Often referred to as periods of policy-induced spikes in activity and asset prices, the reflections can be very positive in reviving the economy after a severe downturn. But reflections can also produce negative side effects, especially when too many stimulus packages create economic and market distortions.
In recent months, the distortions due to the “great pandemic stimulus” have created inflationary pressures. The combination of robust demand growth and pandemic-related supply constraints for goods has resulted in significant increases in consumer and producer prices. This has happened in several countries, including large emerging markets (EM). In fact, rising inflation expectations in emerging markets are already forcing some central banks to raise their key rates. Brazil, Russia and Mexico are some of the most prominent examples of countries where central banks have adopted hawkish measures, tightening their policies. Some other emerging countries are also following suit, in what could be a major reversal of a multi-year period of key rate cuts.
In this article, however, we distinguish between emerging Asian countries with higher savings and higher productivity and emerging countries with higher spending and lower productivity.
While the period of aggressive monetary policy stimulus may have ended in most emerging markets during the current post-pandemic recovery, some higher spending and lower productivity countries have already started to raise rates. . But we don’t expect to see a broader tightening movement in most emerging markets, at least not in the next few months. Three points underpin our point of view.
First, accelerating CPI inflation has been more of a problem in high spending, low productivity emerging countries, which tend to be more sensitive to external cost push factors, such as commodity prices. foreign exchange and commodities. This includes heavyweights from emerging markets like Brazil, Russia, India, Mexico and South Africa. But there are signs that price pressures are likely to ease, even in these countries. Local currencies are stabilizing, non-energy commodity prices are starting to decline, and supply-side bottlenecks are easing, limiting inflation expectations. Therefore, policymakers will likely have more room to wait and see how price conditions evolve, slowing or even suspending monetary tightening programs for some time.
Second, inflation in emerging Asian economies with higher savings and productivity tends to be subdued, despite strong growth and a rapid recovery from the pandemic. Deflationary forces continue to prevail in these countries, as relatively low domestic consumption, high investment and excess savings more than offset the post-pandemic boom and constraints on the supply side of goods.
With regional CPI inflation comfortably ranging from 1% to 2.5%, the major central banks in emerging Asian markets are in no rush to start raising their key rates.
Third, global conditions, driven by advanced economies such as the United States, Eurozone, and Japan, indicate that stimulus and recovery growth has already peaked. As a result, the global economy is expected to slow, with inflation expectations generally easing. This should further reassure central banks in emerging markets who are currently under pressure to increase their monetary policy, further favoring the wait-and-see approach.
Overall, inflationary pressures related to higher spending and lower productivity in emerging markets are still high, but are expected to subside in the next quarter, due to more favorable exchange rate dynamics and commodity prices. Higher savings, higher productivity Emerging countries in Asia continue to present moderate pressure on prices.
In addition, global conditions are expected to moderate near-term growth prospects, easing the constraint on the supply of goods. Therefore, while the period of declining policy rates in major emerging markets may be behind us, there appears to be limited scope for further policy hikes in emerging markets in the near future.