Economic analysts have warned that an early cut in interest rates to control inflation will be counterproductive for developing economies, pointing out that although lower energy prices help reduce general inflation, core inflation levels, which exclude volatile items such as energy and food, are declining. slower.
The Financial Times stated, in an article titled “Warnings to Emerging Markets of Rapid Cuts in Interest Rates Until Inflation Is Controlled,” that after a round of tightening fiscal policies to address high inflation resulting from the lifting of restrictions imposed as a result of the Corona pandemic and the Russian-Ukrainian war, Politicians and policymakers are keen to cut interest rates quickly to boost weak economic growth, but analysts warn that cutting interest rates too early will be counterproductive to developing economies.
In this regard, David Honer, Head of Emerging Markets Strategy and Economics at the Bank of America Research Department, considers that cutting interest rates early will cause more pain when raising prices again.
Honer believes that interest rates must remain high for at least two years to return inflation to what it should be, stressing that the authorities will not return to the pre-Corona pandemic model, of very low interest rates, any time soon.
Analysts add that inflation has been entrenched by structural problems, such as long-running labor shortages in Central Europe and the use of indices in Latin America, where contracts such as lease agreements are automatically adjusted in line with higher prices, as well as wage inflation on both continents.
With widespread price hikes, people expect inflation to remain high, exacerbating challenges for decision and policy makers.
Despite these pressures, some policymakers in Latin America and Central Europe, who were among the first to raise rates, are eager to return to economic growth. For example, the Hungarian Central Bank cut its key interest rate by one percentage point last week to 17 percent. Although the core inflation rate reached 24 percent last April, core inflation reached a higher rate, reaching almost 25 percent. On the other hand, policymakers in Poland stressed that interest rates should remain high in order for inflation to be brought under control, while policymakers in emerging markets were the first to raise interest rates as the cancellation of the measures put in place, as a result of the pandemic, increased demand and inflationary pressures.
William Jackson, chief economist for emerging markets at Capital Economics, said that the continued rise in wages in central Europe and Latin America is one of the biggest issues that worries decision-makers, expecting that a number of central banks will start cutting interest rates this year, with gradual reduction rates, and perhaps more than expected.
