Narrow money trends in emerging economies continue to support optimism about near-term economic prospects. Inflation, meanwhile, is falling, giving a direct boost to real money growth and creating scope for central bank policy easing.

Six-month growth of real (i.e. consumer price-deflated) narrow money in the “E7” large emerging economies rose sharply in mid-2015, signalling an economic pick-up in the first half of 2016, allowing for the normal six to 12 month lead. Consistent with this forecast, industrial output growth rebounded in February and March – see first chart.


Prior economic weakness and recent currency stabilisation, meanwhile, have resulted in a marked reduction in inflationary pressures. E7 annual “core” consumer price inflation peaked in June 2015 and dropped to a 23-month low in March. Headline inflation is also now falling, despite strong food price rises and a waning benefit from lower energy prices – second chart.


E7 inflation trends contrast with G7 developments: G7 core inflation is at a 47-month high and the headline rate is likely to move up sharply to equal or exceed it by late 2016, assuming that commodity prices remain at current levels – third chart.


Falling E7 inflation and currency reversals have relieved upward pressure on interest rates in some countries and opened the door to cuts in others. Among the E7, Brazil, India and Russia may cut rates soon.

China, however, is unlikely to ease further, reflecting recent better economic data and rising concern about renewed housing market speculation. Annual new house price inflation rose to 4.9% in March, a 22-month high, and the historical relationship with narrow money growth suggests a further increase through late 2016, barring an official clamp-down – fourth chart.


Lower inflation and stable or easier monetary policies are likely to sustain solid E7 real narrow money growth, which remained higher than G7 growth in March – fifth chart. The E7 / G7 gap, however, could narrow or close over coming months as real money growth normalises from its recent buoyant pace in China and recovers in the US and Japan – sixth chart.