Morgan Stanley warned that developing countries may not be able to cut interest rates, emphasizing the impact of a more hawkish Federal Reserve raising expectations for a strong dollar.
Morgan Stanley strategists James K Lord and Ioana Zamfir indicated that emerging market central banks could act more cautiously if the Fed raises interest rates. Stating that low inflation may justify a tight easing cycle in emerging markets and even keep real interest rates stable, strategists said that this situation will lead to a sharp contraction in nominal interest rate spreads, leaving emerging domestic markets likely to be vulnerable.
Markets Expect Fed To Continue
After the bankruptcy of Silicon Valley Bank, the market thought that monetary tightening had reached a level that could cause a financial crisis led to expectations that the Fed would end the tightening cycle.
Although the Fed left the interest rates unchanged at the level of 5.00-5.25 at its last meeting, Powell made it clear that he still had an interest rate weapon and two more rate hikes for 2023 remained on the table. Powell’s statements caused confusion in the markets of some developing countries following the Fed’s increase cycle.
25 Base Point Probability 90 Percent
After all these explanations, the expectation of the markets from the US Federal Reserve is that the interest rates will be increased by 25 basis points to the range of 5.25-5.50 at the FOMC to be held on July 26. The probability of an increase is almost certain, at 90 percent, according to CME’s FedWatch data.
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