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Emerging Markets Face Risk of Policy Error Amid Conflicting Priorities

  • Elevated inflation, growth slowdown lead to conflicting goals
  • Dilemma is most acute in Eastern Europe after Hungary’s U-turn
Workers unload goods from a truck in the main market area in Gandhidham, India.

Workers unload goods from a truck in the main market area in Gandhidham, India.

Photographer: Prashanth Vishwanathan/Bloomberg
Updated on

Emerging-market central banks face a Catch-22 where plunging economic growth means they can’t keep monetary conditions tight, but elevated inflation doesn’t allow them to halt rate hikes either.

The result is a growing risk of monetary-policy error. Countries from Poland to Colombia, India to South Korea, are walking the tightrope trying to figure out the exact level of borrowing costs that won’t cripple their economies but will keep a lid on consumer prices. The answer isn’t clear or easy. As long as the Federal Reserve keeps raising rates and China is hobbled by Covid, policy makers in poorer nations remain at the mercy of factors beyond their control.