The monetary policy tide is (slowly) turning

EM central banks have, in general, remained in hawkish mood over recent weeks. Tightening cycles have continued in Mexico, Colombia and South Africa in response to high inflation, while policymakers in Egypt and Pakistan among others have raised interest rates against the backdrop of external strains. But there are some early signs that the policy tide may be turning. The Reserve Bank of India unexpectedly kept rates on hold and we think its hiking cycle is now over. Hungary has hinted that policy may be loosened soon. And a number of small EMs – notably Costa Rica and Uruguay – have recently cut rates. With EM inflation past the peak and likely to fall further over the coming months, we think the balance among central bank will shift towards easing in the second half of the year. That being said, with inflation likely to remain above targets in Emerging Europe and Latin America for some time yet, policy rates in those regions will remain above neutral and higher than most analysts are forecasting.