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The United States Federal Reserve is expected to continue hiking interest rates steadily, by another 75 basis points in 2019, which would bring cumulative rate hikes since end-2017 to 175 bps, according to the latest research report from Fitch Ratings.
On top of this, quantitative tightening is expected to commence in 2019, with the aggregate balance sheets of central banks in the US, Eurozone, the UK and Japan to contract for the first time since quantitative easing began. These forces are likely to result in a further rise in global bond yields and the dollar, and reduced capital inflows to emerging markets, including the APAC region.
Emerging markets with current account deficits are likely to feel the largest effects, namely India, Indonesia and the Philippines. They have already seen some of the steepest currency depreciations, and are responding with interest-rate hikes and currency intervention. Indonesia has placed more emphasis on currency stability, and has correspondingly used up a greater share of its foreign-currency reserves to defend the rupiah.
"We expect pressures from tightening global financial conditions to persist in 2019, punctuated by bouts of risk aversion toward emerging markets and financial market volatility," Fitch Ratings commented in the report.
