eco TV Week

Monetary tightening in emerging countries


Monetary stance is tightening in Emerging Europe and Latam. The reason: inflation resurgence. This may seem premature at this stage since activity in these countries has just come back to its pre- Covid shock.  Is it justified and what are the consequences ?

François FAURE

TRANSCRIPT // Monetary tightening in emerging countries : November 2021

In emerging countries, monetary policies are tightening due to an acceleration of inflation. Is this monetary tightening justified? What are the consequences?

This phenomenon was rare in the second semester of 2020 but higher key interest rates are a trend since the beginning of the year.

For the moment, we can observe a tightening in Europe and in Latin America but not in Asia. This monetary tightening is due to a global acceleration of inflation triggered by a hike in raw material prices, by rising costs of building materials and of industrial products, electronic products in particular.

This monetary tightening is justified because we also observe an acceleration of core inflation, that is to say excluding food and energy prices.

Asian central banks did not react because in these countries, core inflation remained rather low, below 2%.

The tightening is also justified by the fact that some currencies have depreciated significantly since last year, see the Brazilian real and the Turkish pound.

What could be the negative impact of such measures? Two main points, here.

First, it could impede the recovery when the 2020 budgetary support stops.

According to the IIF estimates, in the ten big emerging countries, the impact of the expected drop in primary budget expenditures, excluding interest charges, will have a cumulative negative impact on growth ranging between 0.5% and 1.5% by 2023.

For now, the increase in key interest rates has been less than the acceleration of inflation.

We cannot say that monetary policies are restrictive.

Monetary tightening can make borrowing costs increase for states, households or companies and therefore weigh on their debts.

In the two areas, Europe and Latin America, the median increase in the public debt ratio was of 11 points of GDP in Europe and 8 points in Latin America. The debt ratio for households and companies showed weak and even negative developments. But the increase in public debt ratio combines with higher interest rates on local currency sovereign debts. It reaches higher levels than in late 2019 in Latin America and Turkey in particular.

To conclude, monetary tightening may seem premature given that economies have only just returned to their pre-pandemic levels. But the aim of central banks is to not reawaken inflation expectations because in emerging countries, the risk would be an increase in real interest rates, and not a decrease.

View more videos Eco TV Week

On the Same Theme

General overview 5/19/2022
Whereas the post-pandemic recovery remains fragile, emerging countries are now facing the consequences of the conflict in Ukraine on foreign trade, capital flows and inflation.
Emerging Countries Team 1/26/2022
The Emerging countries team presents its focus for 2022. All year long you will be able to read, listen and watch the publications of its economists on countries such as China, Brazil, Egypt, India or Russia.
Emerging Countries: a still fragile recovery 7/9/2021
The recovery trend is confirmed in EM remains fragile. Household confidence indicators are lagging behind those of business sentiment. Reasons are new waves of contamination, acceleration in inflation and impoverishment caused by the pandemic.
Emerging countries: speed races 4/16/2021
In their spring outlook, the IMF economists expect to see a multi-speed and incomplete recovery of the global economy in 2021. Indeed, speed is the key word for 2021 because the emerging countries are racing against time on several fronts.
Moratorium or debt cancellation? 4/24/2020
According to Eurodad, without a suspension of external debt payments, the debt-to-GDP ratio of the very low income countries will increase to 14 pp. So far, official supports have taken the form of a suspension of payments. Why not favor debt cancellation?  
Kazakhstan : Tenge free-float turns to a strong depreciation 9/16/2015
Kazakh Tenge lost one third of its value in one month. The net creditor position of the government (about 35% of GDP) does not compensate for the negative effects of the fall in the oil prices and the devaluation of the Chinese Yuan that took place only days before the decision of Kazakh authorities to free float their currency. This decision improves the financial leeway of the government, but its stimulus capacity may be dampened by the rates’ tightening, inevitable to stabilize the exchange market. The devaluation undermines the banking sector which remains highly dollarized. To avoid a deposit run, the National Bank committed to compensate the loss due to the devaluation to the households who will keep their deposits until September 2016.
Exchange rates of Emerging countries 8/26/2015
Owing to the fall in the commodity prices, exchange rates of commodity-exporting emerging countries are caught in downward spiral. Exchange rates of commodity-importing emerging are much less impacted. But, regarding the impact on growth, it will remain a negative-sum game.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 1811 articles and 362 videos