Local economic and markets trends still consistent with EM rate cuts

Summary

Trends in monetary policy have become more localized: rather than a global theme for central banks to respond to (e.g., broadly rising inflation pressures, synchronized economic slowdowns, aggressive Fed tightening, U.S. dollar strength, etc.) local economic and financial market trends are now paramount for policymakers, at least in the emerging markets. In that context, emerging market central banks can still, thematically, cut policy rates and have more room to pursue easing relative to peer institutions in the advanced economies.

At the same time, a fair amount of intra-EM and intra-region divergences should also materialize. Select central banks can cut aggressively (Brazil), some more slowly (Chile & Mexico), while others may start tightening cycles (Colombia). In this report, we update our Monetary Policy Space framework to get a sense of which emerging market central banks have policy space for rate cuts, how much room for cuts is available, and where financial markets may be mispriced and offer opportunities for speculators and hedgers.

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