Inflation divides emerging countries into doves and hawks

A year ago, as emerging markets grappled with whether they could afford to block their economies, wealthier governments sidestepped the dilemma by distributing gigantic packages of fiscal support.

Today, a big question facing the developing world is whether to raise interest rates to curb inflation, another problem Western central bankers have so far been able to delay.

More than in the West, rising prices already pose a threat to economic stability in emerging markets. One reason is the rapid rise in world food prices, which are now near their highest level in a decade, according to a UN index closely watched.

That price hike reflects what happened before the 2010 and 2011 Arab Spring protests. “The last time was in the Middle East,” said Hasnain Malik, emerging markets strategist at Tellimer, a consultancy. “Who can say that next time it won’t be in parts of Latin America or Asia?”

The way to tackle the problem is to divide emerging market central banks into inflation hawks or doves. In Latin America alone, all major economies have exceeded their central bank’s inflation target.

In the hawk camp are countries like Brazil and Russia, which have raised rates several times this year to start pushing higher prices.

In Moscow, inflation is a particularly sensitive issue ahead of this month’s parliamentary elections amid soaring food prices. Last week, the central bank showed its hardline credentials when it warned of a 2008-style financial crisis if global inflation was not controlled.

It has already raised rates by 2.25 percentage points to 6.5 percent, with another hike expected on Friday.

Brazil’s central bank has also tried to stay ahead of price increases, raising its policy rate from a record low of 2 percent in four successive policy meetings.

A market stall in Kashira, a city south of Moscow. Among the hawks, only Russia has higher interest rates than inflation © Andrey Rudakov / Bloomberg

But inflation has continued to rise as the Brazilian real plummets against its trading partners and investors have been nervous about President Jair Bolsonaro’s response to the coronavirus pandemic and his increasingly undemocratic rhetoric.

By contrast, among emerging market pigeons, which include Turkey and Poland, governments are openly driving growth and prices are rising rapidly.

In Poland, where the ruling nationalist PiS party has an expansive budget, inflation has hit a decade-long high of 5.4 percent, prompting a former central bank chief and government critic to warn not to crush the increase. of prices would run the risk of a “catastrophe”.

However, as Adam Glapinski, the current chairman of Poland’s central bank, said this week, raising borrowing costs would be “very risky.” On Wednesday, the bank left its benchmark rate at 0.1 percent.

In Turkey, meanwhile, prices are rising 19.25 percent as the economy grew by almost 22 percent in the second quarter.

Sahap Kavcioglu, the central bank governor, has promised that the bank’s policy rate, currently 19 percent, will remain above inflation. But on Wednesday he said the bank would base its policy on core inflation rather than the highest headline figure, undermining that promise.

Timothy Ash of BlueBay Asset Management said Kavcioglu “will cut at the earliest opportunity.” Since 2019, President Recep Tayyip Erdogan, a self-proclaimed “enemy of interests,” has fired three heads of central banks after they tightened policy too much.

Analysts say that the toughness of governments to fight the pandemic has played a determining inflationary role.

Those countries that did not seek to shut down their economies are now experiencing faster growth and more inflation, as in India.

“For those [governments] who absorbed the pain of the illness, hospitalization and death of Covid, the other side is that they let their economies breathe, “said Malik. “That means activity continues and inflation increases.”

In the countries that closed the most strongly, the opposite is true, as in South Africa and parts of Asia.

In Thailand, which currently has some of the toughest lockdown restrictions in the world, inflation more than halved to 0.02% in August. In South Africa, which closed strongly last year and yet has been hit hard by Covid-19, inflation fell in July to its lowest level in three months.

In those countries, “there’s really a deflationary story going on,” said Tatiana Lysenko, lead emerging markets economist at S&P Global Ratings.

As for China, which has taken a zero Covid approach to the pandemic, producer prices are rising, driven by growing international demand. But consumer price inflation has fallen to around 1 percent and the central bank is expected to ease monetary policy to keep the recovery on track.

It is a question for policy makers around the world: which is worse, stagnation or instability. But in emerging markets, the stakes are possibly higher if inflation gets out of control.

Even among hawks, only Russia currently has higher interest rates than inflation. The rest may have to raise their rates much more if they want prices to get back under control.

Additional reporting on Ayla Jean Yackley in Istanbul



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