Emerging market central banks may start slashing the interest rates by the middle of next year to rein in weakening growth and on the back of decelerating inflation and falling US Treasury yields, Capital Economics said.
“Monetary tightening cycles in EMs are advanced relative to DMs (developed markets), and are now drawing to a close in many countries,” William Jackson, Chief Emerging Markets Economist, said in an investor note.
“Elevated inflation will mean that policy will stay tight over the coming months, but the conditions for several EM central banks to start cutting rates could be in place by the middle of next year,” he said.
Some central banks in emerging market like Brazil, Chile, Czechia and Hungary have halted their tightening cycles and many other could opt for the final rate hikes in the next month or two, the economist said.
While central banks of Turkey and Russia have been cutting rates for several months, several countries running large current account deficits such as Hungary, Romania, Chile and Colombia could tighten more than expected in the current cycle, he added.
In India, the Reserve Bank is widely expected to continue raising the policy rates when it meets early in December after failing to meet its inflation mandate.
Emerging market central banks have historically tended to turn quickly from tightening to loosening the monetary conditions. In the past few decades, the regulators have waited around four months on average between ending their hiking cycle and delivering their first rate cut, Capital Economics pointed out.
The larger the preceding tightening cycle, the quicker the move to interest rate cuts, it said.
India raised its key policy repo rate by 190 basis points since early May. Economists expect about 60-85 basis points further hike over the next few months.
Globally, the surge in inflation and a quick monetary tightening by the US Federal Reserve has pushed interest rates higher.
India's headline retail inflation rate fell to a three-month low of 6.77 percent in October from 7.41 percent in the previous month on a favourable base effect, data released on November 14 showed.
Despite the sizeable fall in inflation in October, it has now spent 10 consecutive months above the 6 percent upper bound of the RBI's 2-6 percent tolerance band.
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