Doha, May 29 (QNA) – Economists have warned that premature interest rate cuts in emerging markets will harm their ability to fight inflation. They noted that despite the fact that inflation has slowed due to lower energy prices, core inflation (excluding fuel and food prices) remains stubborn.
In an article titled “Emerging markets warn against rapid interest rate cuts until inflation is brought under control”, the Financial Times (FT) argues that tight labor markets and looser fiscal policy are leading to lower inflation in some developing countries. He cited analysts’ warnings that it would be prolonged.
According to the article, analysts believe that structural issues such as labor shortages in Central Europe and the use of price indexing, which automatically adjusts rental and other contracts to reflect price increases in Latin America, are causing inflation to become entrenched. He says he thinks there are.
A flurry of interest rate hikes around the world to rein in post-pandemic economic restarts and curb inflation caused by the war in Ukraine, policymakers in parts of Latin America and Central Europe are looking to lower interest rates to restart growth. They pointed out that Hungary’s central bank cut interest rates by 1% even though core inflation was nearly 25% in April.
“Emerging market policymakers have been among the first to raise interest rates as demand and inflationary pressures rise as coronavirus lockdowns end. Brazil’s central bank has announced the first round of interest rate hikes by the US Federal Reserve. It started raising rates a year ago in March 2021 and has maintained the 13.75% rate recorded in August last year, despite political pressure to cut rates,” the FT said in an article.
William Jackson, chief emerging markets economist at Capital Economics, told the FT that interest rates would need to remain high for at least a few years to bring inflation back down to normal. (QNA)
