Economists warned that a premature lowering of interest rates in emerging markets will have detrimental effects on the ability to fight inflation in those markets. They noted that, despite the fact that inflation has slowed due to lower energy prices, core inflation (which excludes fuel and food prices) remains stubborn.

In an article titled "Emerging Markets Warned Against Swift Rate Cuts Until Inflation is Under Control," the Financial Times (FT) cited warnings from analysts that tight labor markets and loose fiscal policies will prolong inflation in some developing countries.

The article says that analysts believe inflation is being entrenched by structural issues like the shortage labor in central Europe and the use of indexation in Latin America, in which contracts such as rental agreements are automatically adjusted in line with higher prices.

Following a round of interest rate hikes around the world to curb the inflation that resulted from the re-opening after the pandemic and the war in Ukraine, some policymakers in Latin America and central Europe are looking to restart growth by lowering interest rates. They noted that Hungary's central bank lowered rates 1% even though core inflation was almost 25 percent in April.

"Emerging market policymakers were the first to raise rates as the lifting of Covid lockdowns boosted demand and inflationary pressures. Brazils central bank began increasing in March 2021, a full year before the first rise from the US Federal Reserve. Despite political pressure to cut, it has retained the rate of 13.75 per cent hit last August," FT said in the article.

Chief emerging markets economist at Capital Economics William Jackson told FT that rates need to stay high for at least a couple of years to bring inflation back down.

Source: Qatar News Agency