Middle East conflict rattles markets, the fog of (trade) war and diverging rates paths across emerging markets

32 large emerging markets that account for more than 35% of global GDP will be easing monetary policy in the second half of 2025, supported by ongoing FX appreciation and receding inflation; 23 of them will continue easing well into 2026. But trade tensions, commodity price volatility and fragmentation in general mean that not everyone is marching in step with the Fed, expected to ease by 100bps by end-2026, as should Hong Kong, Chile and Middle Eastern countries. We identify four clusters: (i) those boldly leading the trend with an ambitious rate-cut path by end-2026, often coming from double-digit inflation (Mexico, Hungary, Argentina, Türkiye) but at risk of stalling should oil prices rise further and/or FX depreciation accelerate; (ii) those that were initially bolder but are less so now as inflation emerges again (Czechia, Kenya); (iii) laggards that will move ahead of the Fed (Poland, Romania), thanks to FX appreciation and moderating growth, leading to back-to-target inflation and (iv) those that will pursue moderate rate cuts (China, South Africa, Morocco, India, Indonesia, Philippines, Thailand, Taiwan, Malaysia, Vietnam) as they approach the end of their easing cycles and balance risks between inflation, growth and currency. Brazil remains the EM exception, continuing its own soon-to-end hiking cycle to fight inflation.