MUFG: Global food price index reached its highest level since 2014

February 1, 2021

Inflation divergence in low and high yielding EM EMEA countries: implications for monetary policy.

Macro focus

• Whilst we continue to observe low levels of underlying inflation across low yielding emerging markets (EMs) in EMEA (CEE region, core GCC countries and Israel), inflation has risen and surprised to the upside across a number of major EM high yielders (Russia, Turkey, South Africa and Ukraine). One of the core drivers of this widening differential has been higher food inflation, which has coincided with a sharp increase in the price of some key agricultural commodities. Historically, inflation in high yield EMs is more sensitive to global agricultural commodity prices than in low yielders, given the food components represents a relatively large share of the CPI basket in more frontier EMs (and there is a positive correlative between yields and per capita income levels). Notwithstanding this, we view that the recent rise in food prices would need a further material leg up for it to have a meaningful effect on the inflation trajectory and broader monetary policy across EM EMEA. Indeed, notwithstanding the idiosyncratic (and transitory) nature of the inflation shock in core EM high yielders, output gaps (and spare capacity) remain more negative than prior to the pandemic which will continue to put downside pressure on inflation. Having said that, the inflation shock is expected to remain a core driver of high yield fixed income markets while it endures, and for some EM high-yield countries, such as Russia and Turkey, we expect it to result in the delay of further cuts in rates later in 2021.

FX views

• EM FX: Monetary policy signals diverge in Central Europe

Week in review

• ESG is gaining momentum: stronger inflows into EM bonds and equity funds
• COVID-19 update: case count moderately decreasing across EM EMEA
• Saudi Arabia: FX reserves fall but remain comfortable at USD454bn
• Turkey: CBRT’s hawkish stance continues with unchanged inflation targets
• Hungary: MNB on hold and reinforces hawkish stance
• Kenya: CBK keeps rates on hold
• Iraq: IMF discussions for a USD6bn loan

Week ahead and calendar

• Regional PMIs: respite likely for January readings given renewed lockdowns
• Rate decisions: Czech Rep., Egypt, Ghana and Russia to all remain on hold
• Turkey: inflation to increase to a seventeen month high
• Russia: inflation to rise further in January whilst 2020 GDP to print weaker
• Czech Rep: Q4 2020 GDP to worsen amid COVID-19’s second wave

Forecasts at a glance

• Economic growth, fiscal balance and current account balance
• Inflation, interest rates and FX

Core indicators

• Bond yields, equity markets, FX and CDS spreads
• Capital flows