FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that the disinflationary impulse from lower oil prices will fade in 2016 and the inflation will rise, but stay low in ‘low-flation’ group (TWD, THB, KRW, CNY, ILS).
Key Quotes
“As we work through the remaining slack in the G3 economies, and with most EMs still growing below trend, 2016 should be another year with low inflation rates. But the intense disinflationary impulse from lower oil prices over the past year is likely to fade gradually over the coming year. Indeed, for several EMs, the lagged effects of the large currency depreciations of 2015 will add a positive impulse to headline inflation in 2016. In parts of Asia, in particular, we expect a severe El Niño to boost agricultural prices and food price inflation may also be part of the mix for a period of time. As these developments unfold, it is certainly possible to envisage bouts of interest rate volatility as markets worry – for the first time in several years – about the possibility of central banks falling behind the curve.
Those concerns are likely to be most acute among a ‘squeezed middle’ of EMs where inflation starts moving higher from levels that are not especially low to start with: risks are most conspicuous in Turkey, where the momentum of core inflation is already running in double-digits, followed by South Africa and India, where policymakers will need to strike a difficult balance between supporting growth and keeping inflation in check. EMs in Latin America are at the front line of that balancing act, with rate hikes already delivered in Chile, Colombia and Peru (and more to come in the coming months), and Mexico having indicated a desire to move soon after the Fed.
The sequential uptick in inflation is likely to come from much lower levels in much of Asia. This suggests that in EMs such as Korea, Taiwan, Thailand, China, and even Israel, the challenges of ‘low-flation’ will continue to argue for more easing, and we would be inclined to fade any back-ups in rates in these markets. The CEE economies are prime candidates to exit ‘low-flation’ given the prospect of a second year of above-trend growth, which may raise questions about the EUR/CZK peg and the merits of further easing in Hungary.
Russia is likely to see the biggest disinflation of all – from 15.7% currently to 4% by the end of 2016 – and our economists expect 500bp of cuts in Russia by mid-2016. Even in Brazil, the deep economic contraction should start to weigh on inflation, although rate cuts here are more likely to be a story for the second half of 2016. In our view, it would be premature for the central bank to rush into a sharp easing cycle after waging a hard battle against inflation and inflation expectations, but the opportunity to receive local rates may come earlier as the market front-runs that move. That is also likely to be the cue for considering long positions in Brazilian equities, as we expect to see growth bottoming out midway through the year.”
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