Investors bracing for higher interest rates from the Federal Reserve in 2015 need to expand their horizons or risk being caught off-guard.
Bank of America Merrill Lynch economists suggest 12 of the 16 inflation-targeting emerging-market central banks they monitor will raise rates in the next year, and many will do so by more than markets anticipate. Mexico, Thailand, Hungary, and Israel are among the most likely to surprise, economists Marcos Buscaglia and Ana Madeira said in a Sept. 12 report to clients.
Following the Fed, even at the risk of crimping growth, would represent an effort to prevent a spike of inflation and keep attracting foreign cash.
Capital flows into emerging-market economies averaged $1.1 trillion a year from 2010 to 2013, compared with $697 billion from 2003 to 2007, according to the International Monetary Fund. That helps explain why nine of the 16 central banks reduced their key rates this year and another three kept them on hold.
A potential sign of things to come when the Fed does start tightening the monetary spigot: The Washington-based Institute of International Finance estimates emerging markets attracted just $9 billion in portfolio investments in August, down from an average of $38 billion over the prior three months.
Buscaglia and Madeira, who expect the Fed to move in June, say while investors anticipate tighter policy in Brazil and South Africa, there will also be more aggressive increases elsewhere. Only Poland will have easier credit by the end of next year and low inflation will keep the Czech Republic and South Korea on hold, the economists predict.
Whether there will be a repeat of 2013’s “taper tantrum” will depend on the Fed’s pace, said Pablo Goldberg, senior strategist at BlackRock Inc. “If it moves very fast then that brings some stress,” he told reporters in London today.
Speaking at the recent Group of 20 gathering in Australia, Indonesian Finance Minister Chatib Basri explained the logic he and his counterparts will soon face.
“In the short term, some emerging markets may have to choose stabilization over growth,” Basri told Bloomberg News.