While monetary policy in the industrialized countries is essentially all about keeping interest rates at zero or lower for longer, the world of the emerging markets is much more diverse. On the one hand, interest rates here are usually still noticeably above zero, and on the other hand the Turkish central bank, the guardian of the currency, has recently raised interest rates. In the case of Turkey, this was probably also overdue, as there was a clear threat of a price hike. With inflation rates stubbornly above 10% (y/y) and most recently 11.8%, the key interest rate of 8.25% could not be sustained and even the recent increase to 10.25% should not be enough to push up prices to near the target level of 5.0%. Even stronger guns are needed to achieve this.
In the universe of our currency analyses, Turkey clearly stands out with a massive failure to meet its inflation target, but significant currency losses, which could lead to an accelerated upward pressure on prices, are not uncommon. Accordingly, it is worth taking a look at which countries are missing their inflation targets on the upside and which countries are currently pursuing particularly expansive monetary policies. In view of the economic weakness in all the currency areas we are looking at, however, there must be special reasons for the central banks to come together in order to prompt them to change their monetary policy. Simply exceeding the inflation target or the upper limit of the target range this year, as is threatening in some Eastern European countries and in Mexico, is unlikely to be enough. On the contrary, there would have to be a risk of missing the target next year or even 2022. With the exception of Turkey, the average of the analysts surveyed by Bloomberg does not suspect that any of the countries we are looking at will experience excessive price increases in these years, but the inflation forecasts for some countries, especially in Eastern Europe and Mexico, have recently tended to be revised upwards. When assessing current monetary policy, the key interest rates in Eastern Europe, which are consistently well below 1%, are striking, resulting in a real key interest rate that is very far in negative territory.
The close ties to the euro zone allow interest rates to be set at levels that would hardly be possible in other emerging markets without significant exchange rate reactions. Due to the current price figures, monetary policy is under particular observation here. If inflation remains at a higher level for longer than expected, the central banks in Eastern Europe will have to consider a turnaround in interest rates in the medium term. In contrast to the Eastern European countries, Mexico is characterized by a noticeably higher key interest rate of 4.25%. But here too, the current price figures are likely to trigger a monetary policy response by postponing further interest rate cuts. In emerging market countries in particular, however, inflation rates can accelerate rapidly, which means that an initially comfortable situation can give rise to a need for action earlier than expected. This could be a threat in Brazil, where price figures this year tend to be well below the target mark, but where there are signs of a marked acceleration in the coming months. If inflation expectations should subsequently also become gloomier, an interest rate hike could become necessary here as well.