• Inflation in emerging markets (EM) is set to remain subdued this year, according to Morgan Stanley.
• The bank says there are two structural and two cyclical factors that underpin this view.
• It’s forecasting that 20 of the 28 EM central banks it monitors will either ease or keep monetary policy steady this year.
• Morgan Stanley has identified two risks to its views for this year: commodity prices and politics.

Inflation in emerging markets (EM) is set to remain subdued, meaning most central banks will either be easing or leaving policy settings unchanged this year, says Morgan Stanley.

“In aggregate, we project EM inflation to remain benign,” the bank says.

“Of the 28 EM economies we cover, 12 will see inflation rising in 2019 versus 2018, while the remainder will have stable or lower inflation year over year.

“Nevertheless, by the end of the year, we anticipate that inflation in 83% of EMs will be at or below their central banks’ respective target ranges.”

And that, in contrast to 2018 when many EM central banks were forced to tighten policy to counteract the impacts of Fed rate hikes, a stronger dollar and soaring crude oil prices, will see most keep policy settings flat to lower, Morgan Stanley says.

“We are not expecting many rate hikes in EM this year compared to 2018,” it says.

“We forecast that only eight of the EM central banks in our coverage to hike interest rates in 2019 and just two of those banks to implement more than the two Fed rate hikes that we expect.”

Morgan Stanley says there are two structural and two cyclical factors that should keep inflation low this year.

“Structurally, EMs have embraced rules-based monetary and fiscal policymaking while implementing reforms,” it says.

“From a cyclical perspective, output gaps are negative, with EMs in the early stages of the economic cycle, and commodity prices remaining subdued.”

So, the introduction of fiscal rules for government expenditure and the increased prevalence of inflation targeting, along with sluggish economic growth keeping inflationary pressures contained and relatively subdued commodity prices.

As for the risks to its views this year, Morgan Stanley has identified two: commodity price movements, particularly for oil, along with politics.

“The first is the evolution of commodity prices, particularly oil, which represents a clear upside risk to inflation from a cyclical perspective,” it says.

“Second, we have observed time and again that political imperatives can and will change in EMs, particularly around electoral cycles.

“Politics can drive changes to the macro policy mix, such as a shift towards excessively expansionary policies or policies that seek to redistribute incomes, both of which tend to distort productivity trends, as we saw in 2009-13.”

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