Global tightening cycle begins to lose steam across the developing world
As the concern around global tightening reached a pitch, Australia – traditionally a leading indicator for bond markets – supercharged the debate around peak rates with a dovish 25bp raise. While the monetary policy committee’s concern over global fundamentals is far from a return to easing, pockets of central banks have begun to buck the tightening trend. The PBOC has pursued successive small cuts while reducing capital requirements to stimulate China’s battered financial sector and quickly deteriorating growth outlook. Meanwhile, Angola has joined Liberia in lowering rates for the first time in years as inflation slows and the kwanza appreciates.
Beyond these outliers, emerging Europe and Latin America are also facing the end of their tightening cycles as the size and pace of rate hikes decreases. The latest statements from Polish, Romanian, and Czech central bankers indicated that the hiking cycle is over despite rising inflation and increased market volatility. Latin America, meanwhile, has seen relative currency strength following aggressive tightening in 2021. However, the region’s central bankers increasingly lack space for additional rate increases despite pro-cyclical spending and persistent inflation.
While currency depreciations and capital outflows still pose a risk, the damage to an economy from excessively high rates can be equally as risky, especially as a global recession looms. The lack of policy space can be seen in Asia, where major economies have resisted large rate hikes despite being forced to tighten. Instead, economies across the region deployed reserves to defend their currencies and additional spending to blunt inflation’s effects. These approaches – along with a rising trend of price controls – are a poor substitute for increasing interest rates and are likely to weaken central banks and exacerbate supply-side pressures when neither effect can be afforded.