EM central banks still not following the Fed

The Fed is likely to raise interest rates once again this week but, from the perspective of EMs, the most striking thing remains how few central banks have followed in the Fed’s footsteps. As our diffusion index shows, more central banks in the emerging world have cut interest rates than have raised them since the Fed began tightening policy at the end of 2015. The reasons vary, but include the fact that foreign currency debt burdens are relatively low and current account deficits have narrowed in most EMs over the past couple of years. As a result, EM central banks have been able to set interest rates according to local conditions and, for the most part, these have been consistent with looser rather than tighter monetary policy. We expect the bias to shift towards policy tightening over the course of this year as inflation in most EMs drifts up. But even so, there will be some notable exceptions, such as China and Russia, where we expect interest rates to fall.