• The central banks of a number of developing countries have started to normalize their monetary policies. The global crisis, which began in March 2020, led to an almost overall decline in policy rates in developing counties where inflation targeting is in place. This happened within a fairly short period of time since the beginning of the crisis. Some of the exceptions to this were due to specific factors in individual economies. As economic activity has recovered and inflationary pressure has increased, central banks of developing countries have been forced to start hiking their policy rates.

  • Asynchronous rate hikes are likely to be due to different rates of inflation growth compared to the lows recorded during the crisis. In ACRA’s opinion, the practically simultaneous lowering of base interest rates in different countries at the start of the crisis will not be followed by the same sort of synchronized reaction as monetary policies normalize. This is related to different rates of inflation growth — in countries that have begun a significant normalization of monetary policy, the change in the level of inflation compared to its minimum value since the start of 2020 is higher than in countries where policy rates are currently unchanged (6.8 pps vs. 2.5 pps).

  • Monetary policy remains soft in most developing countries. Despite the beginning of the process of normalization of monetary policy and an increase in policy rates, the central banks of most of the countries in question — including the countries of Central and Eastern Europe (CEE) and some BRICS countries — are still adhering to soft monetary policy. The central banks of Turkey and Kazakhstan are already implementing tight monetary policy, while in Russia, Belarus and Mexico, interest rates are roughly in line with the long-term neutral policy rate. Most developing countries have room to raise the policy rate by 1.5–3.5 pps; it is possible that in the short term, policy rates in these countries will exceed the long-term neutral rate.


Over the first few months since the coronavirus pandemic began, the central banks of Russia, Belarus, the CEE countries, and in a number of other major developing countries that apply inflation targeting, practically simultaneously lowered their policy rates in order to stimulate their economies using “cheap” money (Fig. 1). The sharp decline in economic activity caused by both internal factors (introduction of quarantine measures) and external ones (reduced demand for main export goods) forced central banks to soften their monetary policy to support internal demand and coordinate efforts with fiscal authorities. Fig. 1 shows that by the start of June 2020 (less than three months after the start of the global crisis), policy rates had been lowered in the CEE countries, which have a relatively low level of inflation, and also in major developing economies where there are more tangible inflation dynamics.

The exception to this was Kazakhstan, where the policy rate grew to 12% and then declined to 9.5% (a little higher than the pre-crisis level). This reaction fr om the monetary authorities was due to concerns about risks to the country’s financial stability due to pressure on the exchange rate caused by a sharp drop in oil prices and lower production as part of the OPEC+ deal. Easing these concerns allowed Kazakhstan to ease its monetary policy.

The sample included developing countries with inflation targeting regimes. The share of GDP of these countries in the total GDP of developing countries wh ere inflation targeting is in effect was 77% in 2020.

Figure 1. Policy rates in the sample countries over the first three months of the crisis in 2020

Source: central banks

Inflation at no higher than 5% continues to be the monetary policy target of the National Bank of Belarus; the intermediate target is broad money supply.

THE increase in policy rates is asynchronous due to varying inflation growth RATES

The almost simultaneous easing of monetary policy by the countries fr om the sample at the onset of the 2020 crisis does not mean that with the beginning of the cycle of their normalization, the actions of monetary authorities will be equally symmetrical. The recovery in economic activity in the spring of 2021 and growing inflation are forcing the central banks of developing countries wh ere inflation targeting regime is in place to raise their policy rates, but this is by no means synchronous.

Fig. 2 shows the changes in policy rates and inflation compared to the minimum values for the period since the beginning of 2020. We can see that inflation accelerated in all the countries under consideration against the backdrop of rising food and energy prices in the world markets, as well as the accelerated recovery of domestic demand. The largest increase in inflation was recorded by Ukraine, Turkey, Brazil and Belarus,1 which was largely due to high inflationary expectations. In Russia, Hungary, Mexico, Chile and South Africa, the growth in inflation was moderate, while in the Czech Republic it was minimal.

1 In January 2020, inflation was high in Turkey only (12.2%, with a target of 5%). Inflation was within its target range in Belarus and Ukraine, while in Brazil, it was slightly higher than the target (4.3% vs. 3.75%).

As for policy rates, the most impressive growth was recorded in Turkey relative to last year’s minimum — 10.75 p.p. (fr om 8.25 pps in June 2020 to 19 pps in April 2021), and the lowest growth was in Mexico, Chile, the Czech Republic, Kazakhstan and Hungary. Ukraine, wh ere inflation has increased the most since the beginning of 2020, increased its policy rate by 2 pps. In Kazakhstan and Chile, the increase in policy rates was minimal amid a moderate increase in inflation dynamics.

It should be noted that South Africa, Poland, Romania and India have not yet revised their policy rates although their inflation dynamics are similar. This is probably due to the fact that inflation in these countries accelerated, on average, weaker than in the countries that significantly increased their policy rates (2.5 pps vs. 6.8 pps).

In ACRA’s opinion, the response of central banks to the accelerated inflation turned out to be heterogeneous for a number of reasons. First, countries have demonstrated different levels of inflation growth and its final (at the time of this research) level. In the countries where policy rates remained unchanged, including South Africa, Poland, India, and Romania, the increase in inflation was weaker than in the countries that significantly increased their policy rates, including Turkey, Brazil, Russia, Ukraine, and Belarus. Second, monetary authorities estimate the duration of pro-inflationary factors in different ways and have different abilities to tighten monetary policy. For example, although Ukraine showed the highest growth in inflation among the sample countries, the National Bank of Ukraine raised the policy rate moderately, since it considers the current situation to be temporary and expects inflation to return to its target levels in 2022. At the same time, in Turkey, which experienced comparable growth in inflation, the policy rate was increased by 10.25 pps, which was apparently due to the achievement of the maximum inflation in the past two years amid heightened inflationary expectations (19% in July 2021).

Central banks of the CEE countries also act in different ways: for example, in the Czech Republic, amid a relatively lower increase in inflation compared to neighboring countries (Fig. 2), the policy rate was increased, albeit slightly, while the National Bank of Poland focused on further economic recovery regardless of higher growth in inflation.

Inflation in Kazakhstan and Russia is high and as of July 2021, it exceeded the target levels by 3.4 pps and 2.5 pps, respectively. Nevertheless, Kazakhstan did not raise the policy rate as high as Russia (by 0.25 pps compared to 2.25 pps). This may be explained by the tight monetary policy carried out by the National Bank of the Republic of Kazakhstan, which leaves almost no room for rate increases (Fig. 3).

By contrast, in Latin America, central banks raised their policy rates almost simultaneously. The most significant increase took place in Brazil due to high inflationary expectations, partly caused by the stronger depreciation of the country’s national currency compared to other currencies in the region. Apart from the recovery in economic activity, the common reason for the increase in rates was an expected decrease in monthly asset purchases under the quantitative easing program in the US in the fall of 2021.

The graph shows the difference between the inflation rate in July 2021 (latest available data) and the lowest inflation since January 2020 (for South Africa, the latest available data is from June 2021), as well as the difference between the policy rate on August 16, 2021 and the minimum rate since January 2020.

Figure 2. Variations in policy rates and inflation (as of August 16, 2021)

Sources: central banks, national statistics agencies, ACRA


In the countries under consideration, it is most likely that the wave of policy rate hikes is not over yet, since their inflation still exceeds the targets by 0.5–14 pps In addition, inflationary expectations remain high in many countries, which creates an additional challenge for central banks in terms of reaching their inflation targets.

As shown in Fig. 3, which reflects the long-term neutral policy rates calculated by ACRA (see Technical Note on page 7), only Turkey and Kazakhstan currently adhere to a fairly tight interest rate policy. The Agency does not expect significant changes in interest rates in these countries, since their central banks have most likely exhausted such opportunities. At the same time, a rapid decrease in rates is unlikely there, given the focus of central banks on maintaining financial stability and preventing the depreciation of national currencies (in Kazakhstan and Turkey, the share of savings in USD is high: about 40% and 55%, respectively).

In Russia, Belarus and Mexico, policy rates are almost equal to the long-term neutral rate, but the reasons for the normalization of monetary policy in these countries are somewhat different. In Russia and Belarus, the increase in policy rates was caused by a rapid recovery in domestic demand and high inflationary expectations, while in Mexico, a drought was an additional reason for the rise in food prices.

The other sample countries adhere to soft monetary policy, despite the increase in policy rates in some of them and the potential for their further growth by 1.5–3.5 pps to the level of the long-term neutral policy rate, which, by the way, should not be taken as a ceiling rate. The policy rate may temporarily exceed the long-term neutral policy rate for various considerations of monetary authorities, including in order to curb inflationary expectations, as well as to prevent rapid capital flows and the accompanying excess pressure on the exchange rate of national currencies.

Figure 3. Estimated tightness2 of monetary policies (as of August 16, 2021)

Sources: central banks, ACRA

2 Herein, the tightness of monetary policy means the difference between the current policy rate and the long-term neutral policy rate.

Technical Note. In its estimations of the long-term neutral policy rate, ACRA applies the uncovered interest parity approach. The formula is:

Long-term neutral policy rate = Target inflation +

World real neutral rate (0.5%) +

5-year CDS rate averaged for four non-crisis years.

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Aleksandr Dzhioev
Analyst, Sovereign Ratings and Macroeconomic Analysis Group
+7 (495) 139 03 02, ext. 156
Dmitry Kulikov
Director, Sovereign and Regional Ratings Group
+7 (495) 139 04 80, ext. 122
Ilona Dmitrieva
Managing Director - Head of the Sovereign Ratings and Macroeconomic Analysis Group
+7 (495) 139 04 80, ext. 124
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