BlackRock: Developed market central banks are expected to adopt a "Higher for Longer" interest rate strategy, similar to emerging markets
BlackRock Investment Research Institute stated that emerging market central banks are pausing rate cuts due to inflation concerns, while developed market central banks may need to maintain higher rates for a longer period. Countries like Brazil, Mexico, and Poland have already lowered rates in emerging markets, but are constrained by developed market central banks maintaining stable or slowly decreasing rates. Emerging markets may face pressure on their currencies and damage to inflation-sensitive economies. Maintaining higher rates may not necessarily be bad news for risk assets
According to the Zhitong Finance and Economics APP, BlackRock Investment Institute (BII) stated in a report on Monday that some emerging market central banks are pausing rate cuts due to concerns about inflation, while decision-makers in developed markets may find themselves needing to maintain higher rates for a longer period ("Higher for Longer").
Jean Boivin, head of BII, mentioned that central bankers in emerging market countries such as Brazil, Mexico, and Poland have lowered rates amid cooling inflation and slowing economic growth. In developed markets, the Bank of Canada and the European Central Bank have already cut rates once this year, with the Bank of England and the Federal Reserve expected to cut rates in 2024.
However, emerging market central banks are now approaching the end of an easing cycle as they face various constraints on the extent to which they can cut rates.
He stated, "Emerging market central banks can only go so far in cutting rates, especially with developed market central banks (especially the Federal Reserve) maintaining stable rates or slowly cutting rates." Policy divergences towards the US dollar may put pressure on local currencies and could affect economies sensitive to inflation triggered by a weakening local currency.
BII noted that the Central Bank of Brazil has reduced the key Selic rate from 13.75% to 10.5%, but paused rate cuts in June due to doubts about the impact of loose fiscal policy on inflation. Poland has kept rates at 5.75% since October last year, with measures aimed at protecting households from the impact of high energy costs ending due to inflation concerns.
Boivin mentioned, "We see that post-pandemic, both emerging and developed markets are facing structural factors driving inflation higher, including rising public debt and geopolitical tensions leading to supply chain restructuring."
However, he noted that maintaining higher rates for a longer period may not necessarily be bad news for risk assets. He cited the surge of large US tech stocks and the broader US stock market to historic highs, despite bond yields rising as expectations of Fed rate cuts decrease.
