Amid wartime disruptions, most emerging-market central banks will follow the Fed

KUALA LUMPUR, 21 JULY 2026 —

Most emerging-market central banks will keep policy rates on hold or raise them this year to match Federal Reserve moves as the Iran war drives up energy costs and inflation, the Peterson Institute for International Economics said.

The Washington-based think-tank’s briefing says the conflict that began on February 28 has pushed emerging markets toward tighter monetary policy even as growth slows. The IMF’s April World Economic Outlook cut its 2026 growth forecast for emerging and developing economies to 3.9% from 4.2% in its January projection, while keeping the outlook for advanced economies at 1.8%.

Emerging-market inflation forecasts rose from 4.8% to 5.5% for 2026, compared with a rise in advanced-economy inflation from 2.2% to 2.8%. The dollar’s surge after the war began has added to the strain. It rose against most emerging-market currencies following the February 28 attack and remains volatile.

“The inflation outlook may push many emerging markets to tighten monetary policy even as economic growth struggles,” the Peterson Institute wrote. It said a hard pivot to restrictive global policy would amplify growth costs in emerging markets.

Until the war, many emerging-market central banks had been cutting rates they started lowering in late 2023 or 2024, ahead of the Fed’s first cut in September 2024. That shift came abruptly. In March, South Africa’s central bank held its benchmark rate at 8.25%. Governor Lesetja Kganyago said the bank had warned of elevated risks and was proceeding cautiously.

“Now a crisis has hit, this prudent approach is proving appropriate,” he told reporters. India’s central bank made a similar call in early April, leaving its policy rate unchanged at 6.5%. Governor Sanjay Malhotra said the monetary policy committee believed it was prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook.

A handful of central banks—Brazil, Mexico and Russia—cut rates as planned in March, but most others have paused. Market expectations for Fed cuts evaporated after the war. Before February 28, traders expected two 25 basis-point Fed cuts by year-end; by late March, some forecasts allowed for Fed rate hikes instead.

The Peterson Institute’s analysis of 9,500 monetary-policy meetings across 59 economies from August 1990 to December 2024 shows emerging-market central banks routinely schedule decisions close to Fed meetings and tend to mimic the Fed. The unconditional probability that an emerging-market central bank will move in the same direction as the Fed at its next meeting is about 60%, compared with far lower linkage for advanced-economy peers.

A 100 basis-point Fed hike, the think-tank estimates, typically prompts a 50 basis-point increase by emerging-market central banks within a year, even after adjusting for other factors. “For EM economies, which often are quite open, Fed hikes and the currency depreciation they cause have strong effects on inflation and inflation expectations,” the briefing said.

Emerging-market central banks face a double threat: higher energy and fertilizer prices, and a stronger dollar that raises import costs. Stronger policy frameworks have helped contain past inflation shocks but may not offset the current crisis if it persists.

For Malaysian investors, the message is direct: domestic policy will remain hostage to Washington’s decisions. Bank Negara Malaysia is likely to stay aligned with the Fed to prevent destabilising capital outflows.