Why this emerging market rate cycle will not be like the last

  • Absent a meaningful and sustained pick-up in global inflation, emerging market interest rates are very unlikely to rise in a coordinated fashion as happened in 2013.
  • Transitory factors will play a role in isolated central bank actions, but this should not be mistaken for the asset class wrestling with factors specific to emerging markets; central bank credibility has advanced too far for that in our view.
  • Currency depreciations caused by Covid-19 are in the rear view mirror. The market is quite accepting of very low real rates in the asset class, which suggests credibility is high, even after accounting for the fact that developed market rates are close to zero.

Memories of the 2013 taper tantrum are still fresh in some investors' minds. And as the global transition out of the Covid-19 pandemic picks up momentum, markets will look at what comes next. Inevitably, this will at some point require the withdrawal of global liquidity support.

We think emerging markets (EM) are far less vulnerable to the kinds of moves seen in 2013. Nevertheless, with EM policy rates having been cut to low levels, should investors be concerned over a prospective tightening cycle?

We don’t think so.          

Why investors should not be concerned over rate rises in emerging markets

The chart below shows the past eight years of local rates for emerging markets. The spike in 2013 was triggered the taper tantrum. This was coincident with the beginning of a 375 basis point hiking cycle in Brazil (that then paused for six months before another 300 basis points) and a less pronounced but steady rise throughout 2015. 

During the 2013-2015 period, ten countries in the local emerging market debt index (JP Morgan GBI-EM Index) suffered depreciations exceeding 25%; their central banks eventually were forced to respond with rate hikes.

Today, all but four currencies are trading above or very near pre-pandemic priced levels.


Enhanced central bank credibility will, we believe, allow EM central banks to "look through" the temporary inflation spike caused by the base effects of last year in the coming months. Food inflation is likely to rise modestly in a more prolonged fashion, but sluggish growth recoveries will keep broader inflation trends subdued.

Brazil is likely to begin a rate hiking cycle in the coming months, but outside of possibly South Africa and Russia it is difficult to spot other central banks likely to follow.

Any slightly higher overnight rates in EM are likely to help keep currencies appreciated. That and a lack of any other structural driver suggests any hiking cycles will be far less prolonged than in the past.