Emerging markets have faced a succession of inflationary pressures over the past three years, including trade wars, energy and commodity volatility, and rising geopolitical uncertainty. External and domestic stressors have highlighted the importance of EM central bank credibility to help absorb shocks to the economy and ensure that inflation remains under control.
In a prior post, we analyzed five central banks and their ability to anchor inflation expectations.1 This post extends the framework of our Inflation Fighting Credibility Index to nine EM central banks that operate under inflation-targeting regimes and addresses the following findings:
- the post-pandemic decline in credibility scores;
- the central banks that stand out and why;
- and the investment implications associated with central bank credibility.
The Inflation Fighting Credibility Index
Our Index is formulated using the distance between near-term inflation expectations and the inflation target, with smaller gaps implying higher credibility and, thus, yielding a higher Credibility Index value. Index values are normalized relative to historical data, making them useful to assess how countries perform over time and to provide cross-country comparisons (Exhibit 1).2
Exhibit 1
Most credibility scores have yet to return to pre-pandemic levels
As observed, the nine countries in our sample underwent drastic declines in inflation-fighting credibility during the post-pandemic period amidst entrenched fiscal expansion and a series of external shocks, including Russia’s invasion of Ukraine. Whether for a brief or sustained period, each country held a Credibility Index value of 0 at some point, indicating the weakest anchoring of inflation expectations during their 10-year sample periods.
Despite significant monetary tightening, these countries have been unable (or only briefly able) to return to their historical peaks of credibility in the current period. We observe that in eight of the nine countries examined, the current three-month moving average Credibility Index average tracks below or significantly below the pre-pandemic average (Exhibit 2).
Exhibit 2
Inflation Targets and Index Performance of Selected EM Central Banks
South Africa stands out as the exception. The South Africa Reserve Bank’s (SARB) 3-6% inflation target turned into an inadequate economic measure over time as the target and band became too accommodative, making it easier for the central bank to achieve expectations and below-target inflation. However, in November 2025, the SARB subsequently narrowed its inflation target to the low end of the band at 3%, representing a structural change to the conduct of monetary policy that will test the SARB’s credibility.
As a result, we expect to see a moderate, technical decline in the SARB’s Index score as the next surveys of inflationary expectations will need to converge towards this tighter target. At present, the SARB’s action and statements are consistent with maintaining credibility, as they are aware how central bank credibility is slowly earned but quickly lost.
In the case of India, the series values are generally weaker given that the Reserve Bank of India (RBI) is still in the process of establishing credibility. Looking ahead, the reweighted inflation basket is likely to dampen inflation volatility in India and, in time, allow the RBI to revisit its inflation target. As the experience in South Africa shows, inflation expectations, which are heavily influenced by actual inflationary outcomes, can also be conditioned by the inflation targets of credible, forward-looking central banks.
Two Sides of the Credibility Spectrum
The following Exhibits plot countries’ average local market yields against the Credibility Index (on an inverted right-hand scale; see the Appendix for additional Exhibits). We can see that yields tend to rise as credibility declines. In this respect, Hungary’s yields rose when credibility declined in 2022 (Exhibit 3). Though the central bank was able to regain some of its credibility, progress has stalled since 2024 and yields have been stable despite falling inflation. This leads us to a more cautious view regarding the ability of the National Bank of Hungary to manage inflation expectations.
Exhibit 3
Hungary demonstrates the rise in yields amidst declining central bank credibility
Chile’s Relatively Stable Anchor
Of the nine central banks within the sample, we view the central banks of Czech Republic and Chile as the most credible. Chile and Czech Republic were among the first emerging market countries to introduce an inflation target in the late 1990s before formally adopting their modern frameworks in 1999 and 2002, respectively.
The Czech National Bank has benefited from being part of the EU (despite not being a part of the Eurozone), and, therefore, it has benefited from a shared regulatory/administrative framework designed to keep Eurozone inflation under control.
Conversely, Chile’s progress in controlling inflation is more endogenous (Exhibit 4). The country’s long and established track record of controlling inflation and keeping expectations anchored is evidenced through our Credibility Index analysis (see the Appendix for the Czech National Bank and additional analysis on Chile).
Exhibit 4
Chile vs. Czech Inflation Fighting Credibility Index
Investment Implications
While many factors contribute to local market outcomes, monitoring central bank credibility is a useful tool in the investment decision-making process as it affects the term premia embedded in bond yields.
Beyond realized inflation dynamics, our Credibility Index can help explain shifts in bond yields from changing central bank credibility. Although our Index tool is only one component of investment analysis, central bank credibility remains crucial for macroeconomic stability and, consequently, for asset performance. Weakening credibility implies higher runaway inflation risk, delayed or unexpected policy responses, and a deterioration in institutional trust that is not easily recovered. On the other hand, a central bank that has consistently established stronger credibility signals a greater ability to withstand inflationary shocks, which may indicate quicker, more efficient rate cycles.
Appendix
Exhibit 5
India Local Markets Average Yield vs. Inflation Fighting Credibility Index
Exhibit 6
Brazil Local Markets Average Yield vs. Inflation Fighting Credibility Index
Exhibit 7
South Africa Local Markets Average Yield vs. Inflation Fighting Credibility Index
Exhibit 8
Czech Republic Local Markets Average Yield vs. Inflation Fighting Credibility Index
Exhibit 9-12: Additional Credibility Analysis on Chile
1 “Assessing Central Bank Credibility in Emerging Markets,” May 23, 2023.
2 For each survey, we calculate the difference between 1-year inflation expectations (or 2-year expectations, depending on the inflation target set by the respective central bank) and the central bank’s inflation target. Since these countries have a target band, we calculate the difference between expectations and the mid-value of that band. We then normalize that time series of differences to fall between 0 and 1, using the normalization formula. The index at time “t” then becomes[1]:
Index(t) = 1- {dP(t)- min[Ep(0…T) – P*]}/{max[Ep(0…T) – P*] – min[Ep(0…T) – P*]}
Where:
P* = inflation target
Ep(t) = expected inflation at time “t”
dP(t) = Ep(t) -P*
0< t < T
And a value of 1 indicates inflation expectations are the closest to the target for the sample period.
Sample = 0…T
Source(s) of data (unless otherwise noted): PGIM, as of February 2026.
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