Carry, Currency, and Contagion: The Emerging Market Easing Cycle

Emerging markets are pivoting. After leading the world into aggressive tightening, they are now leading the turn toward easier money. Policy rates that once defended currencies and crushed inflation are beginning to fall — not because risks have vanished, but because the balance of risk has shifted. The question is no longer whether inflation can be contained; it is whether growth can be revived without reigniting currency stress or capital flight. In this new phase, carry compresses, currencies recalibrate, and contagion risks quietly resurface. The easing cycle has begun — but it will not be a free ride.

The pivot to recovery

Emerging markets led the global tightening cycle — and are now leading the easing

Source(s): Multiple Central Bank Websites; Mosope Arubayi

Between 2022 and 2024, many emerging market (EM) central banks tightened earlier and more aggressively than their advanced-economy counterparts. They faced a triple shock:

• Imported inflation from energy and food
• A surging U.S. dollar
• Capital outflow pressures

Now, with inflation moderating and global rate cycles stabilizing, the policy conversation has shifted from *defense* to *recovery*. Across Africa, Latin America, Eastern Europe, and parts of Asia, central banks are cutting rates or poised to do so.

Africa: Easing – but with guardrails

Kenya moved decisively into an easing cycle beginning in late 2025 and extending into 2026. With inflation moderating and FX volatility stabilising, the Central Bank of Kenya has reduced rates to support private-sector credit and reinforce the domestic recovery. The approach is deliberate rather than aggressive. Growth support is improving, but sustainability depends on reserve buffers, external financing conditions, and currency resilience.

Zambia has also lowered rates as inflation retreats from crisis-era highs. The shift reflects improving macro stability, driven by progress in debt restructuring and firmer copper prices. Rate cuts aim to revive domestic demand and restore credit momentum. However, easing remains conditional on fiscal discipline and commodity price stability — Zambia’s core macro anchors.

Egypt has entered easing territory as inflation trends downward from its post-devaluation spike. After a period of sharp tightening to stabilise the pound and re-anchor expectations, the Central Bank of Egypt has begun cutting rates to support domestic activity. Still, easing remains cautious. Egypt’s external financing position, IMF program commitments, and exchange rate management continue to shape policy space.

Nigeria remains on hold, but expectations are building. After an aggressive tightening cycle during its inflation surge and FX reset phase, price pressures are gradually moderating. Structural FX reforms have improved transparency, but vulnerabilities persist. A rate cut would ease fiscal financing costs and stimulate credit expansion. Yet premature easing risks destabilising the naira and widening external imbalances. Nigeria is prioritising macro credibility before stimulus.

Latin America: First In, First Out

Brazil tightened earlier and more forcefully than most peers — and began easing in late 2025 as inflation expectations re-anchored. The easing cycle is supporting domestic investment and credit recovery. Real yields remain attractive relative to peers, though carry trade premiums are narrowing as global differentials compress.

Eastern Europe: Balancing Growth and Stability

Poland began cutting rates in late 2025 as inflation moderated and growth softened. The pivot reflects a recalibration from inflation containment toward growth support. However, currency performance remains sensitive to eurozone demand dynamics and geopolitical risk.

Russia has also moved into easing mode in early 2026 after maintaining very tight policy settings through 2024–2025. As domestic inflation pressures cool and growth momentum moderates, the Central Bank of Russia trimmed rates to support activity. Still, Russia’s easing path is constrained by sanctions exposure, capital controls, and external trade reorientation. Policy remains reactive to geopolitical developments.

Asia: Gradual and Data-Dependent

India has approached easing cautiously, transitioning into a data-dependent cycle in late 2025. Rather than front-loading cuts, the Reserve Bank of India has prioritised inflation anchoring and macro stability. This measured sequencing reinforces investor confidence and limits volatility spillovers in a fragile global liquidity environment.

Why Emerging Markets Are Easing

1. Inflation Has Peaked: Base effects, supply normalization, and prior tightening have cooled headline inflation in many EM economies.

2. Real Rates Are Restrictive: Many EMs now operate with deeply positive real rates — suppressing credit formation and private investment.

3. Fiscal Sustainability Pressures: High nominal rates significantly increase sovereign debt servicing burdens. Easing reduces fiscal strain.

4. Global Rate Stabilization: As advanced economies plateau or ease, EMs gain policy space without triggering immediate capital flight.

The Three Market Channels

• Carry Compression: When policy rates fall, interest rate differentials narrow. This reduces:
  • Incentives for foreign inflows
  • FX carry trade attractiveness
  • Short-term yield advantages

The emerging-market easing cycle is broad but uneven

Source(s): Multiple Central Bank Websites; Mosope Arubayi

Countries with stronger external balances will weather this compression better than those reliant on portfolio inflows.

• Currency Recalibration: Easing cycles often weaken currencies — particularly where inflation credibility remains fragile. The sequencing matters:
  • Ease too fast → FX volatility returns
  • Ease too slowly → growth stagnates

The credibility of inflation targeting frameworks is now the critical anchor.

• Contagion Risk: Emerging markets are interconnected through:
  • Portfolio flows
  • Sovereign bond markets
  • Commodity trade linkages

A policy misstep in one system can trigger repricing across others. In a synchronized easing cycle, vulnerability can migrate quickly.

The Opportunity — and the Risk

• Easing creates opportunities:
• Domestic bond rallies
• Equity re-rating
• Lower refinancing costs
• Infrastructure expansion

But it also reintroduces fragility if reforms stall. The key differentiator will be structural credibility:

• Fiscal consolidation
• FX regime clarity
• Banking sector resilience
• Political stability

Countries that ease with reform will attract capital. Countries that ease without reform risk renewed stress.

A Structural Shift in Global Monetary Leadership

Emerging markets are no longer reactive policy takers. They are increasingly cycle leaders — tightening early, easing early, and shaping global liquidity conditions in the process. The easing phase signals confidence. But confidence is not immunity.

As carry compresses and currencies adjust, investors will differentiate aggressively between:

• Reformers and postponers
• Stabilizers and spenders
• Anchored systems and fragile ones

The easing cycle has begun. Whether it becomes a recovery story — or a contagion episode — depends not on the rate cuts themselves, but on what comes with them.