The impact of higher rates on banks in emerging markets is not straightforward: on the one hand, higher rates typically mean higher net interest margins. On the other, of course, higher interest rates lead to lower growth and increase rates of delinquency.
In a recent report, rating agency Moody’s points out that central banks across EM have been much more proactive in hiking rates to fight inflation than their counterparts in developed nations and that, on balance, banks in these markets should benefit from the higher-rate environment.
Orthodoxy
However, what the report doesn’t examine is a feature of this interest-rate cycle that is different from earlier monetary tightening phases: EM central bankers have been keen to apply an orthodox monetary response to inflation, but the impact of rising rates is remarkably absent – even given that tightening monetary policy typically impacts with a lag.
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