The South African Reserve Bank’s decision to hike interest rates by an aggressive 50bp saw emerging market sentiment sour once again as markets worry about the growth outlook in EM.
The surprise hike from the Reserve Bank of India was a modest 25bp, while the aggressive tightening from the Central Bank of Turkey was simply catching up to what should have been delivered at its meeting last week (and over several previous meetings).
The 50bp hike from the SARB came with a view that “monetary policy remains accommodative”, highlighting that further tightening is likely – especially if ZAR continues to weaken. But this script holds for other EM central banks as they look to regain/strengthen inflation-fighting credibility and shift monetary policy from accommodative to a neutral/tight setting.
Real interest rates need to turn positive for many EM CBs, and better to do it in a tapering environment when short-term US yields are still being held down than when the Fed starts to actually lifts the Fed funds rate in late 2015.
The current fears over EM should be thought of as another speed bump. Those EM countries able to tune their economies properly (reforms/price stability) will be better placed to withstand tighter Fed policy and accelerate once the speed bump has passed.
