Emerging economies hike rates to defend currencies

0

LONDON (AP) — It’s proving contagious.
First it was
the central bank of India. A day later, on Wednesday, its counterparts
in Turkey and South Africa followed suit in raising interest rates. But
any hopes they had in supporting their currencies were dashed as markets
continued to fall.
Currencies in emerging economies have been
battered in recent days by a number of factors, including concern over
global growth and the U.S. Federal Reserve’s decision to rein in its
money-creating stimulus.
A lower currency has the potential to
stoke inflation by raising import prices — controlling inflation is the
primary responsibility of central banks around the world.
India’s
central bank got the ball rolling with its surprise decision Tuesday to
raise its main interest rate by a quarter of a percentage point to 8
percent. Though it justified the move in terms of keeping a lid on
inflation pressures, protecting the rupee is widely considered to have
been a key motive.
Those considerations were clearly behind the
decisions in Turkey and South Africa. The Central Bank of Turkey said it
was raising its main overnight lending rate to 12 percent from 7.75
percent and more than doubling its one-week rate to 10 percent from 4.5
percent.
The bigger than expected increases come in the wake of a
sharp slide in the Turkish lira which has hit a record low against the
dollar on concerns over global growth, the prospect that a police
bribery scandal might destabilize the government, and the change in the
monetary policy stance of the Fed.
Turkey, like other emerging
economies, has seen an influx of foreign investment over the past few
years as the Fed and other central banks have pumped the prime to shore
up their economies. Now that the Fed has begun the process of reducing
its stimulus, much of that money is expected to be withdrawn.
South
Africa’s central bank was clear that the falling rand was behind its
decision to raise its main interest rate by a half percentage point to
5.50 percent.
"The recent depreciation of the rand, if sustained,
will raise significantly the risk to the inflation outlook," it said in a
statement laying out the reasoning behind its rate hike. "Our inflation
forecast shows a marked deterioration, despite the absence of clear
evidence of domestic demand pressures."
The motivation seems clear enough, but will it work?
Some
analysts are skeptical that higher interest rates will be enough to
stem the volatility and point to the past to suggest that the endeavor
will fail.
"The history of using interest rates to defend a
currency usually ends in tears," said Neil MacKinnon, global macro
strategist at VTB Capital.
And if one day’s reaction in the markets is anything to go by, the jury will likely stay out for a while.

Despite
an early lift higher, the Turkish lira is struggling again, down 4.1
percent on the day against the dollar at 2.27 lira. Meanwhile, the South
African rand was down 3 percent at $0.0888.
Copyright 2014 The Associated Press. All rights
reserved. This material may not be published, broadcast, rewritten or
redistributed.

No posts to display