Emerging market countries are facing a difficult choice: to continue or not the monetary easing. On the one hand, most EMs were not facing inflationary pressures 2009, mostly because of the absence of food prices (decrease in commodity prices). On the other hand, given the severity of the US financial crisis, most Central Banks abandoned (at least on a temporary basis) their inflation target regimes and decreased rates as a way of avoiding the crisis to become widespread worldwide. However, by June 2009, many countries had reached or neared the trough in their interest rate cycles. It may be the case that the pace of easing in most countries will slow from Q2 as central banks tune back in to inflation risks as growth bottoms out. Currency depreciation may also cause slowing in the pace of easing, especially among emerging markets dependent on offshore capital flows.
It seems that the Central Banks in Latin America are slowing down the pace of easing. The largest rate cuts in the world this year were seen in this region as rates started from a high base. Colombia kicked off the region's easing cycle with a 50bps rate cut in Dec 2008 and bottomed at 4.5%. Chile surprised with whopping 250bp cuts in Feb and Mar 2009. Mexico suggested in June that it's approaching the end of easing. Peru's easing is still going strong, with another 100bp cut in June and a dovish forward bias.
Another strong reason for slowing down the pace of monetary easing is due to the fact that approximately 20 emerging market economies are following an inflation targeting regime. Nearly every country is facing inflation figures above the center of the established target. Biggest gaps between actual and target inflation: Ghana, Guatemala, South Africa, Turkey, Romania, Philippines, Serbia, Chile, Czech Republic, Hungary, Poland, Slovakia, Israel, Colombia, Peru. We should also take into account that another barrier against easing: currency depreciation pass-through, tougher inflation-output trade-offs and pressure from public opinion and politicians. It is also true that most EMs are experiencing higher growth and inflation than the US. In Russia, India, China monetary policy remains expansionary.