Asia and Latin America experienced a weak third quarter. Turkey's home-grown currency crisis has so far not spread to other countries, but a tighter monetary policy by the Fed will pose challenges for many emerging markets in 2022. In China, the real estate market is slowing, a looser monetary policy and foreign trade are shoring up growth.
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The Turkish lira depreciated 28% against the USD in November after the central bank cut its policy rate for the third time since September. President Erdogan's influence on monetary policy and his preference for lower interest rates were already known. However, in an environment of robust growth (3Q GDP was 13% above pre-crisis levels) and high, rising inflation (annual inflation stood at 21.3% in November), this last move in interest rates triggered panic. Evidence of greater tolerance to currency devaluations makes a quick reversal of the dangerous experiment unlikely.
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Central banks in the other emerging markets are more in line with the textbook. In 13 of the 23 largest developing countries, key interest rates have increased since the start of the year. This is in response to rising inflation and currency depreciation risks. In November 2021 alone, eight central banks continued to raise interest rates, although their economic recovery is lagging behind Turkey's. These included the central banks of Mexico, Russia and the Czech Republic, although GDP in these countries has not even reached pre-crisis levels. Inflation,
however, has risen further on average and is putting pressure on the central banks. A tightening by the US Federal Reserve could further accelerate the rate cycle.