Global Themes /

First in, first out: EMs will lead DMs out of the rate hiking cycle in 2023

  • Some emerging market central banks have tackled inflation more proactively than their developed market counterparts

  • They hiked rates sooner and lifted them higher, taking real rates into positive territory and driving down inflation

  • The rate cycle may be close to ending in LatAm (Brazil, Chile), C. Asia (Armenia, Kyrgyzstan), SSA (Angola, Mozambique)

First in, first out: EMs will lead DMs out of the rate hiking cycle in 2023
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Patrick Curran
Stuart Culverhouse
Tellimer Research
22 November 2022
Published byTellimer Research

As the world’s largest central banks continue playing catch-up with runaway inflation, it is easy to forget that some of their emerging market peers have been much more proactive and are now starting to ease their feet off their monetary brake pedals.

In this Global Theme, we review 81 economies (including 67 emerging and frontier markets) and build a simple four-factor scorecard to pinpoint where the tightening cycle may be closest to ending.

Five economies – Angola, Armenia, Brazil, Mexico and Paraguay – meet all four of our applied criteria, with a further 14 economies clearing three of these hurdles. All are frontier or emerging markets. These markets may find that they are able to negotiate the coming global macro downturn better than their peers, with positive consequences for consumption, investment and local asset performance. A key risk to this thesis is the possibility of currency weakness once the local monetary tightening cycle ends.

Our rate hiking scorecard highlights a substantial EM/DM divide

In building our scorecard, we consider the following:

  • When did the monetary policy tightening commence? The medicine of tighter monetary policy needs time to take effect. Central banks that started the rate rise cycle earlier have a better chance of taming inflation and moving rates back down. For our sample set, central banks typically commenced their tightening cycles a year ago, with most emerging market central banks moving well ahead of their developed market counterparts.

  • How much have interest rates been lifted? The more pronounced the monetary tightening that has occurred, the more likely the economy will adjust to kill off excess demand, allowing inflation to moderate. For our data sample, central banks have lifted interest rates by over four percentage points from pandemic-era lows, on average.

  • Where are nominal policy rates now versus inflation? In much of the world, interest rates have been below inflation for many years. This made sense when economies had surplus capacity and price expectations remained firmly anchored. But central banks may now need to inflict a period of positive real interest rates to bring inflation under control. For our data sample, the average real interest rate is -4.25%, meaning that inflation is substantially higher in most countries than the central bank policy rate.

  • Is inflation now starting to fall? Across our sample set, near-term inflation trends appear finely balanced. Half of the countries are seeing inflation continuing to rise, while half are seeing inflation decline. Clearly, a declining inflation trend provides more wiggle room for central banks to cut policy rates.

Our full dataset and country ranking is presented in the Appendix, but we highlight below how the sampled countries shape up against these criteria. Only five countries have cleared all four hurdles: Angola, Armenia, Brazil, Mexico and Paraguay.

Rate hike scorecard summary

Latin America looks to have travelled furthest to tame inflation 

Several Latin American countries find themselves towards the top of our scorecard. Some regional interest rates were already being raised in Q1 2021, and the average uplift in policy interest rates since then for the five highest-ranking markets in our scorecard (Brazil, Mexico, Paraguay, Chile and Peru) is almost 9% (ie more than double the global average). Real interest rates in these markets are currently above 1% ie more than five percentage points higher than the global average.

We highlight below the example of Brazil, which tops our scorecard. Despite being one of the first central banks to begin lifting rates in the current cycle, interest rates clearly lagged the uptick in inflation. This is in stark contrast to previous inflationary episodes, when the central bank executed much more timely tightening. Nevertheless, with inflation now falling rapidly, policymakers seem to have scope to pause or even reverse the tightening cycle.

Brazil: interest rate and inflation

Some Sub-Saharan Africa economies (such as Mozambique and Zambia) were also quick to move into the tightening phase of the interest rate cycle. In contrast, other central banks (notably Japan) have not yet commenced hiking rates. And in selected other markets (China, but also Russia and Angola) rates are already on a downward trajectory.

Of course, there are other metrics not included in our scorecard that are also relevant. For example, economic growth, unemployment, debt levels and debt structure. Some of these fundamental factors are incorporated into our debt sustainability rankings.

Currency movements could limit easing efforts

One of the secondary effects of the proactive tightening stance from many EM central banks has been relative resilience to the strong US dollar; advanced economy currencies feature prominently among the weakest currencies so far this year.

But expectations of a flat-to-declining local policy rate dynamic could lead to a shift in investor perceptions, particularly if the largest developed economies continue to raise interest rates. Weakening currencies import inflation and hence would curb EM central banks' flexibility to loosen monetary policy.

Currency performance


Rate tightening scorecard - key inputs