Emerging markets are caught between a weak dollar and tight domestic constraints. Poland is one of the few countries pursuing a consistent monetary policy in line with forecasts, helped by the stabilization of domestic factors and a relatively lower dependence on external ones (notably the US dollar).
The global monetary easing cycle in emerging markets, which began in mid-2023, is slowing: the broad-based wave of interest rate cuts seen from early 2024 to mid-2025 is fading.
Only four central banks in emerging economies (including Poland) cut rates in November, while 11 have kept interest rates unchanged for six months or longer. Poland is one of the few countries where monetary easing is proceeding as expected – it has neither been accelerated by external factors (which usually speed up the easing cycle), nor materially restrained by internal factors (such as inflation), which in many countries have forced a more cautious stance.
Roughly one third of central banks eased monetary policy more than forecast – thanks to favorable external conditions, including a 10% depreciation of the dollar this year and Fed rate cuts – mainly in South and Southeast Asia as well as in Mexico.
At the same time, almost half of emerging-market central banks eased less than projected – mainly in Central and Eastern Europe and Latin America. Their cautious stance is driven by local factors, such as persistent inflation, fiscal constraints and political uncertainty: for example, Hungary has left interest rates unchanged for 14 months despite cumulative cuts of 650 basis points, while Brazil reversed course and has raised rates by 450 basis points.
The pace of monetary easing in developing countries is expected to continue declining through 2026, as more economies reach or approach their terminal rates.
A maturing easing cycle in emerging markets
The monetary easing cycle across global emerging markets (EM), which began in mid-2023, has, in Allianz Trade’s view, entered a more mature and increasingly divergent phase. After a broad wave of rate cuts from early 2024 to mid-2025, the pace of easing slowed sharply in Q4 2025: only four central banks cut interest rates in November, and 11 have kept rates unchanged for six months or longer.
Of the 27 major EM central banks tracked by Allianz Trade, 25 remain technically in a cutting cycle, but a clear split has emerged between those that continue to actively ease policy — such as Mexico, Poland, South Africa, the Philippines and Egypt — and those that have largely completed their adjustment or run out of room to ease because of persistent inflation and domestic constraints. Hungary, for instance, has left rates unchanged for 14 months despite cumulative cuts of 650 basis points, reflecting fiscal concerns and currency instability.
Domestic factors now dominate. Persistent inflation and fiscal imbalances are limiting scope for further easing, even as the Fed continues to cut rates. Brazil, meanwhile, has taken a very different path, reversing earlier cuts and raising interest rates by 450 basis points since September 2024, mainly due to domestic fiscal and inflation concerns. In Turkey, domestic developments also forced a return to tighter monetary policy: after events in March, the pace of easing slowed, and the year-end inflation target was lifted to 32% — around 8 percentage points above the original goal.
In the longer term, Allianz Trade expects the overall pace of monetary easing in developing countries to keep slowing into 2026, as more economies reach or get close to their terminal policy rates.
Weak dollar, shifting Fed expectations – but uneven effects
In a year marked by a relatively weak US dollar and significant shifts in expectations for Fed policy, some EM central banks gained more leeway to accelerate and deepen their easing cycles. From end-2024 to end-Q3 2025, the US dollar index fell by nearly 10% (with most of the decline occurring by end-April 2025).
However, when comparing cumulative rate changes between end-2024 and end-Q3 2025 with Allianz Trade’s December 2024 forecasts, nearly half of the major EM central banks actually eased less than expected — mainly in Central and Eastern Europe and Latin America. Allianz Trade’s analysis shows that only about one third eased more than forecast — primarily in South and Southeast Asia and in Mexico — while the remaining banks broadly matched the earlier projections.
Asia and Mexico: more easing than expected
Some central banks in Asian emerging economies and in Mexico eased more than expected, due to a combination of external factors: more aggressive US trade policy toward the region, closer synchronization with the Fed cycle and the dollar’s trajectory.
ASEAN countries together with India were among the hardest hit by US tariffs, whose initially announced rates exceeded 30% before being lowered to around 19–25% for Indonesia, Malaysia and Vietnam. Thailand and India have yet to reach an agreement with the White House. The US trade offensive has weighed on the region’s growth prospects, giving central banks an additional reason to ease policy in an environment of limited inflation risks.
Monetary policy in the region remains closely aligned with the Fed, reflecting historically high sensitivity to US rates: almost all Asian EMs stayed near the –50 bp mark relative to the Fed in the first three quarters of 2025. Softer growth prospects and an intensified trade war have led to depreciation of many Asian EM currencies against the dollar, constraining hard-currency inflows — a trend likely to persist in countries where current account deficits are widening, such as the Philippines and Indonesia.
Mexico, while still moving broadly in sync with the Fed, also eased more than expected (–250 bp), given weaker domestic activity and contained price pressures.
A turning dollar and renewed pressure on EM
Looking ahead, a potential reversal in the dollar’s trend could help bring the easing cycle to an end in some EM central banks. In recent weeks, the dollar’s appreciation has signaled a possible return to a stronger USD, eroding earlier gains for EM external and fiscal positions and increasing both debt-servicing and import costs.
This risk is particularly acute for countries with large external financing needs, such as Ethiopia, Egypt and Argentina, and for those heavily exposed to USD-denominated debt, such as Colombia.
Domestic constraints: CEE and Latin America turn more hawkish
At the same time, domestic factors have forced central banks — especially in Central and Eastern Europe and in Latin America (notably Brazil and Colombia) — to adopt a more hawkish stance than expected.
Local inflation pressures, particularly stubborn core and services inflation, driven by strong wage growth, tight labor markets and imported inflation, have remained elevated despite ongoing global disinflation. The clearest example in CEE is Romania, where an unexpected spike in inflation toward double-digit levels was triggered by fiscal tightening and changes in energy policy. This kept core inflation high despite weaker external pressures.
In Latin America, central banks have remained cautious as food price volatility, resilient domestic demand and fiscal uncertainty (including pre-election risks, spending concerns and debt worries) increased inflation risks. Over the longer term, significant monetary easing depends on a clear slowdown in core inflation and wage growth, as well as credible fiscal discipline. Conversely, renewed fiscal slippage, currency depreciation, food or supply shocks, and stronger-than-expected domestic demand could prolong or even intensify hawkish stances in countries such as Brazil and Colombia.
Debt markets: strong performance, but valuations stretched
The current easing cycle has had a constructive impact on EM debt markets. Local-currency bonds have delivered strong returns as yields fell from multi-year highs, and hard-currency spreads compressed toward historical lows. Technical factors — renewed capital inflows and improved liquidity — have further supported performance.
However, valuations now appear stretched, leaving limited room for further spread tightening. Economic growth has stabilized on the back of lower financing costs and resilient domestic demand, but geopolitical risks and fiscal slippage remain headwinds. As the EM easing cycle matures, the initial tailwinds for EM debt are fading. At this stage, returns are driven more by carry than by price gains, and investors are increasingly focused on relative value and credit selection.
At the same time, the risk–return profile is deteriorating: lower interest rates support growth and liquidity but can also encourage fiscal complacency, increasing vulnerability to external shocks. In short, late-cycle dynamics call for a more tactical approach, emphasizing selective exposure and active risk management.
EM currencies: from early-cycle support to late-cycle fragility
At the start of an easing cycle, EM currencies typically benefit from improving risk sentiment and capital inflows, especially when global liquidity is ample and the US dollar is weakening. But as the cycle matures, these advantages diminish.
High real yields compared with developed markets attract carry trades and support currencies. The average gap between real interest rates in EM and in the US (i.e. after inflation) is currently around 2 percentage points, helping attract capital inflows, build reserves and preserve room to respond to FX volatility. When the Fed started its own easing cycle, that gap was close to zero .
As the easing cycle ages, however, these benefits fade. Interest-rate differentials narrow, reducing the appeal of carry trades, while positioning becomes more crowded, raising the risk of profit-taking and sharp corrections. Moreover, if monetary easing coincides with deteriorating fiscal positions or political uncertainty, currencies can underperform despite lower rates.
In the current cycle, while the BRL, MXN and ZAR remain favored from a carry perspective, the risk of abrupt reversals is rising, given stretched valuations and increasingly visible global (including geopolitical) risks.
A global correction would push EM back toward easing
Overall, a major correction in global markets (extending beyond the AI and technology sector) would likely trigger further monetary easing. A downturn would hit chip and electronics manufacturing hubs such as Taiwan, Malaysia and Vietnam, where demand could weaken, as well as Middle Eastern economies higher up the value chain, such as Israel, a leading AI R&D center. Gulf countries would also be exposed, given their substantial investments in the sector.
A fall in demand for AI-related commodities would be felt particularly in Chile, Indonesia and the Democratic Republic of Congo, key exporters of lithium, nickel and cobalt. All these factors could push many EM central banks back toward more accommodative policy.
Beyond AI, a broad global correction could also reduce global liquidity, adding another reason for EMs to ease further.
Source: CEO.com.pl – “Banki centralne rynków wschodzących stoją na rozdrożu. Polska jednym z nielicznych wyjątków”
