Many emerging economies have not rushed to dampen the current rise in inflation within their markets, opting instead to raise interest rates very gradually (see chart attached). These countries have started to experience negative real interest rates. This policy choice is partly because most of the rise in inflation has been driven by food and fuel, with core inflation moving only modestly higher. In addition, there is an expectation/view that some of these inflationary pressures will dissipate into 2012, in particular food inflation.
In Dollar terms, agricultural prices have been trending noticeably lower in the past few months, helped by a supply response in many countries. In July 2011, agricultural prices remained a massive 46.7% above the level that prevailed a year ago. However, the price pressure has moderated this year, with prices down 11.9% relative to the peak in early March 2011.
In addition, emerging market central banks are becoming increasingly concerned about the weakening state of the global economy, especially within developed economies.
This gradual monetary policy response from most emerging market central banks is not lost on the SA Reserve Bank, and it is clear that the Reserve Bank can afford to hold off on hiking SA interest rates while they digest incoming information, especially the most recent economic and market development in the US and Euro-area.
Interestingly, despite the rise in inflation, emerging markets bonds have done quite well in 2011, helped by the ongoing global search for yield. In contrast, equity markets have struggled. Foreign ownership in many emerging market local currency bond markets is at record levels (including SA). These market would obviously be vulnerable to a change in global economic sentiment – but in the meantime the current trend is firmly intact.
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In addition, emerging market central banks are becoming increasingly concerned about the weakening state of the global economy, especially within developed economies.
This gradual monetary policy response from most emerging market central banks is not lost on the SA Reserve Bank, and it is clear that the Reserve Bank can afford to hold off on hiking SA interest rates while they digest incoming information, especially the most recent economic and market development in the US and Euro-area.
Interestingly, despite the rise in inflation, emerging markets bonds have done quite well in 2011, helped by the ongoing global search for yield. In contrast, equity markets have struggled. Foreign ownership in many emerging market local currency bond markets is at record levels (including SA). These market would obviously be vulnerable to a change in global economic sentiment – but in the meantime the current trend is firmly intact.
Download the presentation slides
