The Federal Reserve’s Upcoming Interest Rate Changes and the Impact on Emerging Markets

As the Federal Reserve prepares to potentially raise interest rates, central banks in emerging markets are signaling that they may be close to or already at peak rates. The Central Bank of the Philippines is a prime example, having raised rates by 225 basis points over the past year—including a 25 basis point increase this month.

President Nestor A. Espenilla Jr. on Economic Growth in the Philippines

President Nestor A. Espenilla Jr. has stated that he expects 7% economic growth for 2019 in the Philippines and that their determinants of interest rates are always guided by forecasts and prospects for the global economy. He has also addressed concerns about a potential global recession, noting that Indonesia is attempting to boost domestic demand and support economic growth through government policies, as well as positive growth in China which could offset any potential recession in Europe and the US.

Inflation and Risks Ahead

The Central Bank of the Philippines is forecasting headline inflation to be at 3.5% and core inflation at 3.3%. President Espenilla acknowledged that one of the biggest risks to this projection is oil prices increasing significantly; however, he emphasized that price stability remains a priority for his government and they will take any necessary steps to achieve this goal without raising fuel prices too drastically.

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What is the current expectation for the Fed fund rate?

Our assumption is that the Fed fund rate will be at 5.25%.

What is the forecast for global inflation?

The forecast for global inflation is that it will be below 4% and most likely around 3.3% this year.

What is the projected economic growth for the Philippines?

President Marcus says that the Philippines will grow at 7% this year.

Are central banks in emerging markets at peak or close to peak?

It seems that central banks in emerging markets may be close to peak or at peak already, while the Fed is still expected to raise rates.

Is 225 basis points sufficient to bring inflation back to target levels in Indonesia?

The central bank of Indonesia believes that 225 basis points is sufficient to bring inflation back to target levels this year, assuming there are no unforeseen conditions.


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