TRANSCRIPT
Emerging Economies: between resilience and monetary vigilance
Salim Hammad
Isabelle Gounin-Lévy: You're an economist in the Emerging Economies team. In this complicated context for Advanced Economies, Emerging Economies have fared relatively well since the beginning of the year. Export performance has been solid and domestic demand has also supported economic activity.
But can you tell us what role has monetary policy played in that performance?
Salim Hammad: Well, yes, you're absolutely right. Emerging markets have performed better than anticipated at the start of the year.
On the external front, exports of goods have held up relatively well in the face of the tariff shocks, especially in China, ASEAN countries, as well as northern Asia. And also on the domestic front, we've seen internal demand support or drive growth, and that dynamic has been supported by monetary policy.
And in fact, since the start of this year, in two-thirds of the largest emerging markets that we monitor, we've seen central banks cut rates, and that monetary easing has been relatively broad, based across regions, with even in some economies, cuts that have been significant, namely in countries such as India, Indonesia, Egypt, and Mexico. And this has helped to fuel the acceleration of credit growth.
And in some parts, in particular in Central Europe and Latin America, that has been more poignant. On the other hand, in China, we have a different story there, because both lenders and borrowers have been extremely cautious, and so bank lending growth has actually slowed down.
Elsewhere, in other Economies, such as Vietnam, as well as Romania, central banks have actually kept rates unchanged, partly because of persistent pressures on these countries' currencies.
And a notable exception here is Brazil, where monetary authorities have actually tightened policy further over the first half of this year, due to persistent inflation above the 3% target of the central bank, and because of unanchored inflation expectation due to fiscal concerns. And in that country, policy rates have reached 15%, which is a historical high in 25 years. The good news, though, is that both inflation and credit have been edging back in recent months, albeit at a slow pace.
Isabelle Gounin-Lévy: Monetary easing across emerging markets has been supported by several factors. What are they?
Salim Hammad: Well, first, the wave of monetary easing reflected the disinflationary trend of last year, which persisted in 2025. And that's been true in Asia, in Latin America, as well as Turkey.
On the other hand, in Central Europe, inflation has proven more sticky, with the exception of Poland. The external environment, however, has also helped to support disinflation and monetary easing in emerging markets. We've seen, for instance, global oil prices decline.
We've also seen higher imports of cheaper Chinese goods, and external financial conditions have been favourable. And that has taken the form of increased capital inflows, lower risk premia, and more importantly, a weaker US dollar. And so, as a result, most emerging market currencies have appreciated against the US dollar in 2025.
Central European currencies, meanwhile, have actually also either stabilized or appreciated against the euro. And so, the bottom line is that these favourable exchange rate movements ultimately gave central banks more room to cut interest rates.
Isabelle Gounin-Lévy: What are your expectations regarding the course of monetary policy in emerging markets? And what are the main points to watch?
Salim Hammad: Well, the first point to keep in mind is that monetary easing will continue in the short-term in emerging markets. Central banks will continue to support economic activity and try to offset the negative impact of the tariff shock.
The number of central banks that will cut rates is likely also to go up. Brazil might be easing its cycle in the first quarter of next year, for instance.
But overall, however, monetary easing is likely to be more measured. One of the reasons behind that is because of the pace of this inflation, which will slow down, limiting the room for further rate cuts, and also because of inflation proving more sticky in some regions of the world, including Central Europe, India, as well as Mexico.
Meanwhile, international financial conditions should remain favourable for monetary easing. The interest rate differential with the US should remain wide, and expectations point to a continued softening of the US dollar. However, there are some risks to that scenario.
There are, of course, geopolitics, US trade, fiscal, and monetary policy that could affect investor sentiment, and at a more country-level, idiosyncratic risks in the form of macroeconomic fragilities and political risks. And in that respect, some countries in Latin America tend to stand out. And both these risks could eventually materialize into increased capital outflows from the region and translate ultimately into more frequent episodes of downward pressure on emerging market currencies.
Recorded on September 11th 2025
