A potentially powerful El Niño event is forecasted to occur through the October-December period, posing significant inflation risks to emerging markets worldwide. The U.S. National Oceanic and Atmospheric Administration has predicted an 81% chance of a very strong El Niño, which could be among the most powerful on record since 1950.

Impact on Emerging Markets

Emerging economies, already strained by the Middle East conflict, are particularly vulnerable to the effects of El Niño. Households in these economies spend a larger share of their income on food, and agriculture plays a significant role in their economies. This raises the risk that central banks will have to maintain tighter monetary policies for longer.

India, the world’s most populous country, is among the most exposed due to its heavy dependence on the annual monsoon. The country’s Meteorological Department has warned of potentially the lowest rainfall in over a decade, threatening crop yields and food prices. India is the world’s largest rice exporter and second-largest sugar producer.

Regional Impacts

Asia is expected to feel the heat, with higher energy and fertilizer costs weighing on external balances and economic growth. Central banks in the Philippines, Indonesia, Korea, Pakistan, and Sri Lanka have already hiked interest rates at least once this year. A severe El Niño could keep borrowing costs elevated across the region through the start of the following year.

Colombia and Peru are among the Latin American economies most exposed to El Niño-related weather shocks. Colombia’s reliance on hydropower makes reservoir levels a key inflation indicator, while Peru’s central bank has warned that inflation could exceed its target this year due to high oil prices and El Niño’s impact on fishing and agriculture.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.