Despite difficult financial conditions weighing heavily on growth prospects, emerging markets are displaying a resiliency to market swings, thanks in large part to their more aggressive monetary policy frameworks.

Central bank policy rates
January 2021 vs. current

Bar graph showing January 2021 vs. November 2021 central bank policy rates in the U.S. and several Latin American and Eastern European countries

Bloomberg, Principal Global Investors. Data as of November 12, 2021.

Even as annual United States CPI inflation hit 6.2% in October, the Federal Reserve (Fed) has remained resolutely patient. In stark contrast, several Latin American and Eastern European central banks responded promptly to the emergence of inflation risks and, so pro-active has been their response, they are likely to have normalized policy rates to pre-pandemic levels even before the Fed starts hiking in late-2022.

Both developed market (DM) and emerging market (EM) central banks agree on one thing: High inflation should prove temporary. However, EM central banks typically don't have the luxury of waiting for pressures to ease. With their long histories of high and uncontrolled inflation, Latin American and Eastern European inflation expectations aren't as firmly anchored as in DM countries. Furthermore, since food and energy, which have seen some of the sharpest price increases this year, make up a significant portion of EM household spending, stagflation is a significantly more pertinent threat.

Steep monetary tightening and the accompanying tightening in financial conditions have inevitably weighed on the growth performances of these Latin American and Emerging European economies. Yet, their more robust, vigilant policy frameworks also mean they are looking more credible and increasingly resilient to market swings. Long-term investors will welcome these improvements, identifying that these emerging markets that potentially offer higher returns, are gradually posing less risk.


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