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Inflation divides emerging countries into doves and hawks

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More than in the west, rising prices are already a threat to the economic stability of emerging markets. One of the reasons for this is the rapid rise in global food prices, which are now near their highest level in a decade, according to a closely watched study. UN Index. A big question facing the developing world today is whether to raise interest rates to curb inflation, another issue that Western central bankers have so far been able to delay.

The way to deal with the problem is to divide the central banks of emerging markets into hawks or inflationary doves. In Latin America alone, every major economy has now exceeded its central bank’s inflation target.

This price spike reflects what happened before the Arab Spring protests of 2010 and 2011. The last time was in the Middle East, said Hasnain Malik, emerging markets strategist at Tellimer, a consultancy firm. . Who can say that next time will not be in parts of Latin America or Asia?

In the hawkish camp are countries like Brazil and Russia, which have raised their tariffs several times this year to begin to curb price increases.

In Moscow, inflation is a particularly sensitive issue in the run-up to parliamentary elections this month amid soaring food prices. Last week, the central bank showed its hawkish credentials when it warned of a 2008-type financial crisis if global inflation were not brought under control.

It has already raised rates 2.25 percentage points to 6.5%, and another hike is expected on Friday.

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

But inflation continued to rise as the Brazilian real collapsed against its trading partners and investors were pissed off by President Jair Bolsonaros’ response to the coronavirus pandemic and his increasingly undemocratic rhetoric. .

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

In contrast, among the doves of emerging markets, including Turkey and Poland, governments are openly pursuing growth and prices are rising rapidly.

In Poland, where the ruling nationalist party PiS runs an expansionary budget, inflation has peaked at 5.4% in a decade, prompting a former central bank chief and government critic to warn that not to crush the rise in prices would risk a catastrophe.

Yet, as Adam Glapinski, the accommodating current chairman of Poland’s central bank, said this week, lifting borrowing costs would be very risky. On Wednesday, the bank left its key rate at 0.1%.

In Turkey, meanwhile, prices rose 19.25 percent as the economy grew nearly 22 percent in the second quarter.

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

Timothy Ash of BlueBay Asset Management said Kavcioglu will cut at the very first opportunity. Since 2019, President Recep Tayyip Erdogan, a self-proclaimed enemy of interest, has fired three central bank chiefs after tightening their policies too much.

Countries that have not sought to shut down their economies are now experiencing faster growth and more inflation, like in India.

Analysts say the harshness of governments stuck in the fight against the pandemic has played a key inflationary role.

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

For those who have absorbed the pain of illness, hospitalization and death from Covid, the flip side is that they have allowed their savings to breathe, Malik said. This means that activity continues and pushes up inflation.

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