HONG KONG—Central banks in fast-growing emerging markets, especially in Asia, look set to become less aggressive on interest-rate increases and other tightening measures in coming months as global growth and inflation pressures ease.
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Southeast Asia's largest economy, Indonesia, became the latest country to strike a softening tone on inflation. Its central bank left the benchmark rate at 6.75% Thursday. In a statement that accompanied the decision, Bank Indonesia said "inflation pressures are decelerating," and omitted language from its previous statements that indicated it might take an "interest-rate response" to price pressures.
Not long ago, policy makers in emerging markets viewed inflation as a top threat. But declines in food and energy costs, where the price rises have been most severe, along with signs of slowdowns in the U.S. and China, the world's two largest economies, are causing policy makers to reassess the risk of rising prices.
"Central banks are starting to think twice about whether they should be raising rates, whereas a month ago it looked a lot clearer that rates had to go higher," says Robert Subbaraman, economist for Nomura in Hong Kong.
The shifting landscape is leading to some surprises for markets. In Poland, one of Europe's faster-growing emerging economies, the central bank said Thursday it would pause tightening after it raised its benchmark interest rate 0.25 percentage point, the fourth increase this year.
"We're closer to the end of hikes than some thought," said Bartlomiej Wit, chief fixed-income trader at ING in Warsaw.
A big question mark is China. A raft of measures to slow its economy and fight inflation seem to be having an effect, as growth indicators such as purchasing managers surveys and real-estate sales show a slowing. Yet government reported inflation data have yet to slow, and it isn't yet clear if the tightening cycle there is coming to an end.
Slowing down now means central banks could have more trouble fighting inflation should growth rebound later this year, as many economists expect. Most emerging economies are running at or near full capacity, putting pressure on consumer prices and wages to rise. And many central banks have been perceived as dragging their feet in lifting rates over the past year. It could also spell slower currency appreciation in some countries.
"We know monetary policy works with a lag, and central banks could find themselves even further behind the curve. Overall in Asia, monetary policy has been too loose," says Mr. Subbaraman.
Wall Street economists have been issuing a drumbeat of revisions to interest-rate forecast in the emerging world. In the wake of Indonesia's actions Thursday, HSBC economist Wellian Wiranto said there is a "building risk" that he will lower his forecast for rate increase in coming months. "Bank Indonesia looks likely to want to prolong their holding stance further still," he wrote.
Loan growth, a broad measure of how much new money is sloshing around economies, continues to be robust, especially in Asia. So far this year, China and India are the only major economies in the region whose loan growth has slowed, yet in both cases, they remain above nominal GDP growth, indicating an oversupply of credit.
Two important inflation drivers globally are tapering off: food and energy. Oil prices are more than 10% below their peak for the year as they hover around $100 a barrel. And food prices increases are waning. The U.N.'s Food and Agriculture Organization reported Tuesday that its global food index was down slightly in May from April, though it forecast prices will remain high.
South Korea, an economy that straddles the developed and emerging worlds, faces an important test Friday when its central bank meets amid conflicting economic signals. /The government cut its measure of first-quarter growth Wednesday to 1.3% from 1.4%, showing that the economy doesn't have as much momentum as previously thought. Yet its core inflation rate, which excludes food and energy, hit 3.5% in May, the fastest rate in nearly two years.
In India, which has battled a high inflation rate with nine rate rises since early 2010, analysts are starting to wonder if after one more rate increase, the Reserve Bank of India might be done for the time being.
"We now believe that India's tightening cycle is in its conclusive stage," says Sanjay Mathur, economist for RBS in Singapore, citing weak domestic demand, especially investment.
In Latin America, Peru, the region's fastest-growing economy the past five and 10 years, has signaled it will slow its tightening. And economists now expect copper hub Chile to slow the pace of rate increases after lifting its benchmark rate 0.5 percentage point three times in as many months through May.
Brazil is a notable exception. It raised rates Wednesday and hinted more increases are on the way as economists expect continued strong inflation there.
In Australia, a developed economy that is nonetheless often seen as a bellwether for emerging markets because its growth is tilted toward Chinese and Indian demand for its natural resources, the central bank kept interest rates steady on Tuesday, indicating their fears of medium-term inflation may have abated.
—Marynia Kruk in Warsaw contributed to this article.
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