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Central Banks in Developed and Emerging Economies Take Diverging Paths in September

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Central Banks in Developed Economies Take Last Gasp at Rate Hikes, While Easing Continues in Latin America and Emerging Europe

September proved to be a crucial month for central banks across major developed economies as they delivered what appeared to be a last-ditch effort in implementing rate hikes. Meanwhile, economies in Latin America and emerging Europe seemed poised for continued easing.

Reuters data revealed that nine of the central banks overseeing the ten most heavily traded currencies held rate setting meetings in September. However, only three of them – Sweden, Norway, and the European Central Bank – decided to raise rates, with a cumulative increase of 75 basis points. The US Federal Reserve, the Bank of England, as well as Australia, Canada, and Japan, opted to maintain the status quo. New Zealand’s central bank did not hold a meeting during this period.

Comparatively, August saw two rate hikes in four meetings, which is typically a quieter month for monetary policy decisions. In total, G10 central banks have implemented 1,150 basis points of rate hikes across 36 moves year-to-date in 2023.

Bjoern Jesch, the Global Chief Investment Officer at DWS Group, stated, “We have reached cruising altitude for the central banks – at 4% for the ECB and 5.25%-5.50% at the Fed, I do not see any more hikes in the near future.” Jesch added that while the current policy is restrictive, it will have a dampening effect on growth, but not to a significant extent.

The financial markets have experienced significant shifts in recent weeks due to the need to adapt to the “higher for longer” approach advocated by major central banks.

Diverging rate trajectories were particularly evident in emerging economies, where 16 out of the 18 central banks in the Reuters sample held meetings during September.

Latin America and Central and Eastern Europe have been leading the easing cycle. Brazil, Chile, and Poland have all lowered their benchmark rates, resulting in a cumulative total of 200 basis points of rate cuts in September alone. Thus far in 2023, the total number of rate cuts across these economies has reached 420 basis points through eight reductions.

Hungary also joined the easing trend by reducing its one-day deposit rate by 100 basis points to 13% last week, aligning it with the main base rate which was left unchanged.

Nonetheless, the recent surge in oil prices has introduced uncertainty regarding the pace of the easing cycle.

Kaan Nazli, a portfolio manager at asset manager Neuberger Berman, noted, “Most policymakers are quite cautious. I don’t think we’re back to the point where these central banks will start tightening again…but if you are a central banker, especially of an oil importing country, you do become more cautious.”

Conversely, a select number of central banks in emerging markets have continued with rate hikes. Turkey, grappling with inflation pressures and a sliding currency, implemented another significant rate hike of 500 basis points. Russia raised its benchmark by 100 basis points, while Thailand surprised markets with its decision to hike rates. As a result, the total monthly tightening across developing economies reached 625 basis points in September, and the cumulative total for the year-to-date stands at +3,475 basis points through 30 hikes.

The recent events in central bank monetary policy decisions have significant implications for the global economy. As central banks in developed economies pull back on rate hikes, emerging economies face the challenge of balancing inflationary pressures and economic growth. The trajectory of global interest rates will continue to be closely observed as central banks navigate this delicate equilibrium.

More detail via Yahoo Sports here… ( Image via Yahoo Sports )

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