* MSCI EM stocks index falls
* S.African central bank expected to hold rates
* Colombia downgraded to junk by S&P
May 20 (Reuters) - South Africa’s rand ticked higher on Thursday ahead of a central bank meeting, while most other emerging market currencies rose slightly, even as hints of eventual policy tightening from the Federal Reserve clouded their outlook.
The rand added about 0.3%, with the central bank widely expected to hold rates at a record-low 3.5% later in the day. But rising inflation expectations, as well as eventual Fed tightening are expected to push the bank into hiking rates.
Still, relatively higher interest rates in the country have benefited the rand, as waning concerns over the COVID-19 pandemic spurred a return to carry trades. The currency is about 4% higher this year and is among the best performing EM currencies.
“(The) South African Reserve Bank’s focus is likely to be on increased risks to inflation, but on the other hand, it will point to the fragile economic recovery,” Elisabeth Andreae, FX and EM analyst at Commerzbank wrote in a note.
“The market has priced in some monetary tightening this year. Nevertheless, a more hawkish tone today could further fuel interest rate expectations and thus give further impetus to the rand.”
Russia’s rouble inched up 0.1% and Turkey’s lira added 0.5% after two days of losses, while the dollar fell after a strong bounce overnight.
The greenback was boosted on Wednesday by minutes from the Fed’s last meeting revealing that there was more talk of tapering the bank’s bond purchases than initially expected. This comes amid surging U.S. inflation, which the Fed has indicated is a factor for eventual policy tightening.
Higher lending rates in the U.S. tend to make EM and other risk-driven assets less attractive, due to a narrower gap between yields.
EM stocks slipped 0.2%, with Turkey’s bourse leading losses across Europe, the Middle East and Africa with a 0.5% fall.
In Latin America, Colombia’s peso is expected to tumble after the country lost one of its three investment grade ratings. S&P Global Rating relegated its credit rating to junk status.
The cut comes against the backdrop of violent nationwide anti-government protests, as well as the recent withdrawal of a tax reform, which many saw as negative for economic growth.
Colombia’s downgrade also outlines the cracks exposed in EM debt by the COVID-19 pandemic, which has seen several EM countries faced with the possibility of becoming “fallen angels”, - once investment-grade debt that is downgraded to junk status.
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Reporting by Ambar Warrick in Bengaluru; editing by Emelia Sithole-Matarise