This year has been all about interest rate cuts. As Western central banks took their policy-easing efforts to ever new levels, emerging markets had little recourse but to cut rates as well. Interest rates in many countries from Brazil to the Czech Republic are at record lows.
Some countries such as Poland and Hungary are expected to continue lowering rates. Rate cuts may also come in India if a reluctant central bank finds its hand forced by the slumping economy. But in many markets, interest rate swaps are now pricing rate rises in 2013.
Are they correct in doing so? Emerging central banks will raise interest rates by an average 8 basis points next year, JP Morgan analysts predict. UBS, in a recent note, reckons more EM central banks will raise rates than cut them. Analysts there offer the following graphic detailing their expectations:
Rates swaps are indeed pricing a half-point rise in Mexico over the coming year and 75 bps by end-August 2013. They are also pricing small rate rises in South Korea and Chile.
Some of these signals may be false, especially if growth fails to pick up as expected. Benoit Anne, head of emerging markets strategy at Societe Generale, notes Mexico as an example where hawkish talk has lulled swaps markets into pricing in rate rises: