Following a bout of market turmoil that has weighed on their currencies, central banks in emerging economies are moving fast to contain the damage.
Late on Tuesday, the Central Bank of the Republic of Turkey raised its key interest rate to 12 percent from 7.75 percent to try to stave off inflation and support the Turkish lira, which has fallen sharply in recent weeks.
The decision was taken at an emergency meeting that the central bank called after the currency hit a record low 2.39 per US dollar on Monday.
Photo: Bloomberg
In Beijing, the People’s Bank of China on Tuesday injected more money into the country’s financial markets to ease strained credit conditions, as the Reserve Bank of India unexpectedly raised its benchmark interest rate by one-quarter of a percentage point to 8 percent to prop up the ailing rupee.
Following the move, the rupee rose 0.7 percent to trade at 62.66 rupees to the US dollar.
Much of the turmoil in global financial markets over the past week has been due to developments in emerging economies.
Argentina suffered the most eye-catching fall in its currency, the peso, amid concerns over Buenos Aires’ economic policies.
However, there are broader worries that emerging markets, which have been some of the world’s fastest-growing in recent years, are particularly vulnerable at the moment. Among the key risks are China’s economic slowdown and the US Federal Reserve’s decision to scale back its monetary stimulus.
The Fed is expected to announce another US$10 billion reduction in its monthly bond purchases that would see them drop to US$65 billion. For the past few years, the Fed’s stimulus has helped shore up financial markets around the world.
The quantitative easing had the effect of lowering US Treasury interest rates, pushing investors to seek out higher returns in fast-growing emerging economies like India and Brazil.
Now that that prop is being taken away and the interest rates on Treasuries are starting to look more attractive, a lot of the money underpinning emerging markets is flowing out of them, pressuring currencies as a result. That has been evident across the emerging world over the past few weeks, notably in India and Turkey.
After the Argentine peso, the emerging market currency that has performed worst this year has been the Turkish lira.
After Turkey’s central bank raised its key rate, it said its goal is to lower the country’s inflation rate, which reached 7.4 percent last month. In a statement, it forecast that inflation would meet its 5 percent target by the middle of next year.
Ahead of the meeting, the lira stabilized, trading 0.1 percent higher at 2.26 lira to the US dollar, after Monday’s record decline.
Meanwhile, the IMF on Tuesday said there was no reason to panic in emerging markets, even as countries like India, Turkey and Argentina were facing sharp capital outflows and currency pressures.
“This is not like May [last year], this is not a panic situation,” IMF Monetary and Capital Markets Department director Jose Vinals said.
He called the turbulence in emerging economies “a combination of idiosyncratic factors” across the affected countries, unlike the broad-based capital outflows earlier this year that were sparked by the Fed’s expected tightening of monetary policy.
“We don’t see the commonality that existed in May, which was the US tapering. This [the recent turbulence] is something where the US monetary policy tapering expectations have so far not played an important role,” he said.
Instead, Vinals said the jitters are signs that the emerging economies “have yet to complete their adjustment to more volatile external conditions and higher risk premiums.”
“Some of these headwinds may be homemade and some others could come from abroad,” Vinals told journalists.
“But one of these fundamentals has to do with keeping inflation under control and central banks in emerging markets must have a sufficient degree of independence so as to act” in a timely manner to keep a steady hand on inflation, the IMF official said.
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