Page 45 - bne magazine July 2022_20220704

bne July 2022 Special Report I 45
in those countries have failed to curb inflation’s explosive growth.
Czechia, in particular, has seen inflation soar into double digits to levels not
seen since the early 1990s, despite aggressive hikes by the central bank. Moldova’s inflation climbed to 29% in May. Slovakia’s inflation hit a 22-year high and Romania, Poland and Bulgaria, to name a few more, are all suffering from double-digit rates of inflation.
The spike in inflation has been blamed on supply chain disruptions caused by the coronavirus (COVID-19) pandemic and then exacerbated by the food shock associated with the war in Ukraine.
The World Bank downgraded its global economic outlook in May to 2.9% for this year, but warned that the world
is facing a real danger of stagflation.
But we are not there yet, says IIF. Central banks in the emerging
and developing markets have been pushing through rate hikes and as
bne IntelliNews reported in a survey
of negative real interest rates – the precursor to stagflation – about half
of the countries in Emerging Europe have negative rates in single digits, which means central bank still have the ability to bring inflation under control with some more aggressive rate hikes.
“All that said, we are not that bearish on EM. Most of the big emerging markets started hiking well ahead
of advanced economies, which now leaves real longer-term interest rates across many EMs well above their G10 counterparts,” Brookes et al said. “That provides some protection from this global interest rate shock.”
However, as the bne IntelliNews survey showed, the other half the countries in Emerging Europe have negative interest rates in double digits, which means
the size and frequency of rate hikes ahead will be very painful for these countries, which will almost certainly face recession in the next few years as they battle to bring inflation down.
“There are obviously pockets of weakness in EM – where real interest
Source: Haver, IIF
rates are deeply negative – and risks for these countries are rapidly mounting. We see these instances as idiosyncratic, however, and not emblematic of a broader emerging markets problem,” Brookes said.
As both the World Bank and IIF report, the current inflation shock is the
most serious since the 1970s, but at the same time the shock is not as big as the previous episode and central banks are much better equipped
to deal with it, especially after the
pioneering work of the New Zealand central bank in the 1970 that was the first to adopt inflation rate targeting.
“The world is experiencing one of the biggest interest rate shocks in recent memory. That’s not quite so obvious looking at longer-dated nominal interest rates, but is very clear looking at real yields, which have risen substantially,” Brookes said. “The real 10-year Treasury yield in the US is up from -1.1% at the end of last year to +0.7% now, a bigger rise than during
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