Central bankers in emerging markets, from Poland to Turkey, have paused any monetary easing plans due to soaring oil prices triggered by the Iran conflict. Policymakers are grappling with the dual pressures of rising inflation expectations and heightened risk aversion.
After a series of disruptions—from the COVID-19 pandemic to the Russia-Ukraine war—that rattled markets, slowed growth, and fueled inflation, central banks had finally grown optimistic about the resilience of the global economy and the easing of price pressures. However, the current situation has reintroduced uncertainty.
The U.S. dollar has strengthened, and yields on U.S. Treasuries—a key indicator of borrowing costs for emerging markets—have also risen.
Although some of the initial market moves have reversed, the outlook for global growth and inflation remains uncertain amid geopolitical instability.
Before the outbreak of the conflict in late February, ten out of fifteen major emerging-market central banks were expected to cut interest rates by at least 10 basis points over the next six months. By Tuesday, that number had dropped to six, according to JPMorgan calculations. For those still expected to ease policy, the scale of anticipated cuts has also diminished.
Petar Atanasov, Co-Head of Sovereign Research and Strategy at Gramercy Funds Management, said, “Until the uncertainty linked to the Iran conflict is resolved, emerging-market central banks are likely to send increasingly strong signals that they are in wait-and-see mode.”
The shift is not limited to emerging markets. Over the past week, expectations for Federal Reserve rate cuts have also been scaled back significantly.
This change is most evident in emerging Europe, where market pricing in the Czech Republic, Hungary, and Poland now suggests a possible shift toward policy tightening over the next six months.
Recently, Polish policymakers have acknowledged that the room for rate cuts has narrowed. Their counterparts in Hungary and the Czech Republic have also pointed to the risks and uncertainties brought by the “Iran conflict.”
Juan Oltz, Societe Generale’s economist for Central and Eastern Europe, Middle East, and Africa, noted that energy imports are a major factor. He highlighted that countries like Poland and Hungary, located in Central and Eastern Europe, are particularly sensitive to oil price movements.
Analysts say the uncertainty stemming from rising crude oil and overall energy prices lies at the heart of a global balancing act for emerging markets—they must weigh concerns over upward price pressures against the impact on economic growth.
James Lord, Global Head of Foreign Exchange Strategy and Emerging Markets at Morgan Stanley, stated, “This is a negative shock for growth. It acts as a tax on consumption and could prompt central banks to tighten policy due to inflation risks.”
In Latin America, markets have already priced in a more moderate easing cycle, but rate cuts are still expected given weak economic growth. One central bank in the region has held its benchmark interest rate at 15%—the highest level in nearly two decades—since ending an aggressive tightening cycle in July last year.
Turkey is another focal point. As an energy importer, it is highly vulnerable to inflationary pressures. The country’s central bank will announce its interest rate decision on Thursday.
Atanasov of Gramercy added, “We expect the Turkish central bank to respond by pausing its rate-cutting cycle, awaiting further clarity on the conflict’s duration and its economic spillover effects.”
The Middle East conflict and its ripple effects may lead central banks to pause or slow the pace of rate cuts in the near term. However, the longer-term outlook remains less clear.
During 2021–2022, when economies were still recovering from the pandemic and suddenly faced shocks related to the outbreak of the Ukraine war, emerging-market central banks led the way in raising interest rates to combat inflation—while many of their developed-market peers still viewed inflation as transitory.
Lesetja Kganyago, Governor of the South African Reserve Bank, emphasized that central bankers’ assessment of energy price effects and their inflationary consequences will once again be critical.
He warned that underestimating the persistence of inflation could lead to more aggressive and costly policy measures later. In contrast, acting early would allow policymakers to adjust more smoothly over time.
Kganyago pointed to the 2021/2022 experience as a lesson: “Central bankers who moved early found that they did not have to take aggressive action all at once, unlike those who only responded in the second half of 2022.”
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