Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More

Rate hikes to be rare this year, say brokerages

There are a couple of reasons why ‘low’ inflation is seeping into EMs.

, ET Bureau|
Feb 20, 2019, 07.42 AM IST
Getty Images
Inflation is likely to remain benign in the current year.
The trend of low inflation, which was so far limited largely to developed countries, is now visible in emerging markets (EMs). Core inflation in these regions after excluding energy prices dropped to a 15-year low of 2.8 per cent, according to Morgan Stanley. The inflation difference between EMs and the developed markets dropped to 120 basis points (bps) in 2018 from 400 bps in 2015. The easing inflationary pressure is also reflected in the Citi’s Inflation Surprise Index, which has dropped to the lowest in three years.

Inflation in several countries is significantly lower than the comfortable level of their central banks. Over 80 per cent of the central banks in EMs covered by Morgan Stanley have inflation below the forecast since January 2017. This is the prime reason for central banks to turn dovish, a term used to represent a tendency to keep interest rates lower.
Inflation is likely to remain benign in the current year.

JP Morgan has shifted forecast for 10 developing nations’ central banks towards dovish monetary policy. According to Bank of America, central bankers sound the most dovish since 2009.

The shift in central banks’ stance is in contrast to the Street’s perception about two months ago when Nomura Holding had said it wasn’t ‘banana’ to talk about deflation in developing economies.

There are a couple of reasons why ‘low’ inflation is seeping into EMs. One, the central banks have become more systematic and follow rigorous rulebased policy structure. Today 19 central banks follow a rule-based policy structure to target inflation compared with just 3 in 1998. Due to aggressive inflation targeting, central banks had raised rates last year; therefore, they have ample room to reduce it now. Second, the wage growth has been lower than the GDP growth since 2014 thereby reducing inflationary expectation. In addition, higher agricultural production and better food supply chain have contributed to lower food inflation.

Inflation is likely to remain benign in the current year. According to Morgan Stanley, inflation in 83 per cent of EMs will be at or below their central banks’ target range by the end of the last quarter of 2019.

Also Read

Street may be starting to factor in rate hike possibility in 2020

Private telcos to gain Rs 36,000 cr/month from rate hike, at cost of consumers: Congress

Bank of England set for faster rate hikes if Brexit resolved

Fed rate hike in 2019? Even Morgan Stanley has dropped the call

Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service