Inflation across emerging economies has tumbled to its lowest level in a decade, prompting central banks to cut interest rates in a sharp reversal of last year’s trend.

Weaker global economic growth has already helped persuade the US Federal Reserve to drop its forecasts for further interest rate rises this year, opening the door for the likes of India, Egypt and Azerbaijan to lower borrowing costs.

A softer economic backdrop has also squeezed price pressures, with a measure of inflation across emerging markets falling to 3.2 per cent, a level not seen since 2009, according to Capital Economics. The same measure, which excludes particularly volatile economies such as Argentina and Venezuela, as recently as October hit the highest level in almost three years.

Sanjay Joshi, head of fixed income at asset manager London & Capital, said it “would not be a surprise” if expectations for interest rates across emerging markets fell further as the global economy reverts to the “low growth/low inflation scenario that was the norm post-financial crash”.

Russia, Mexico and the Philippines are among the countries expected by analysts to reduce interest rates this year, as ebbing inflationary pressures and faltering global growth give central banks a reason to ease monetary policy.

A succession of interest rate cuts would be a sharp contrast to 2018, when 35 emerging market countries raised policy rates and just 23 loosened, according to data from Central Bank News. For much of last year, rising US interest rates and a strengthening dollar forced many central banks to raise rates in order to stabilise their currencies and prevent investors pulling money out.

So far this year, four emerging market countries have raised rates while 11 have cut.

Oliver Jones, a markets economist at Capital Economics, said the combination of lower borrowing costs and more subdued economic growth should help shorter-dated emerging market bonds outperform longer-dated, given returns from the former are more shaped by the outlook for interest rates.

However, it adds up to a tougher backdrop for EM equities, he said. The MSCI EM index, a benchmark for stocks, has jumped almost 10 per cent this year. 

“Experience suggests that when earnings come under pressure that equity markets tend to fall even if, at the same time, you have got a bit of support coming through from central banks cutting rates,” said Mr Jones, who added he “wouldn’t be surprised” to see EM equity earnings decline this year, despite consensus estimates for growth of 3-4 per cent. 

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