With memories of the May-August plunge in financial markets still raw, emerging market central banks are gearing up for the coming shift in U.S. monetary policy and an expected fresh bout of market volatility, currency depreciation and capital outflows.
The global spillover of the Fed’s policy was on display last week as South Africa’s central bank ruled out rate cuts due to concern that its rand currency would be vulnerable to further deprecation and thus boost inflation when the Fed reduces its asset purchases.
Nigeria’s central bank struck a similar note, saying it may need to raise rates next year in response to a likely rise in U.S. and European interest rates along with higher election-linked domestic spending.
And in Ghana the central bank is stockpiling reserves so it can defend the currency in the event that capital heads for the exit.
But the repercussions of the Fed’s policy is not limited to emerging markets.
Australia’s central bank has for months voiced its unhappiness with the strong dollar and last week Guy Debelle, assistant governor of the Reserve Bank of Australia, acknowledged that only a change in the Fed’s easy policy stance would help push down the dollar.
“The sooner the day comes, the better,” Debelle said about a change in Fed policy.
Glenn Stevens, RBA governor, echoed this view, acknowledging that the Aussie’s strength was partly a result of the very low interest rates in advanced economies, such as in the U.S.
And in Taiwan, the country’s central bank governor warned of higher interest rates from the Fed’s tapering of asset purchases, likening the situation to “an aircraft carrier sailing full-steam ahead in a small pool,” according to press reports.
Meanwhile, minutes from the Federal Open Market Committee (FOMC) meeting in October released last Wednesday showed that debate over when to start tapering is in full swing.
Financial markets zeroed in on the sentence that the FOMC could slow the purchases “at one of its next few meetings” if economic conditions warranted, triggering fears that the December meeting could result in a decision to trim the $85 billion monthly purchases of Treasuries and housing-backed debt.
But based on public statements, Fed officials still seem far away from a consensus over when the economy is strong enough to handle a withdrawal of the extraordinary stimulus.
And given that the Fed held off from tapering in September, partly due to concern over the possible consequences of the political impasse in Washington D.C., it would seem unlikely for the FOMC to ignore a similar risk next year given that the current funding of the federal government expires Jan. 15.
“I fully expect that we’ll be talking about it (tapering) in December, January and March,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta Federal Reserve Bank told CNBC.
Turkey, one of the emerging markets that have seen its assets fluctuate in sync with Fed policy expectations, took another of its byzantine monetary policy decisions this week.
The initial statement by Turkish central bank’s monetary policy committee said key rates had been maintained, a decision that was largely expected given a recent strengthening of the Turkish lira and fall in inflation.
But upon closer scrutiny and following the bank’s meeting with economists the day after, it has become clear that the central bank, without much public fanfare, has switched its key policy rate and de facto tightened its stance.
The first clue to the change came from the bank’s statement on Tuesday, which no longer as usual contained a parenthesis with the words “policy rate” after “One-week repo rate at 4.5 percent.”
Then on Wednesday, the bank acknowledged in its meeting with economists that the one-week repo rate should no longer be considered the reference rate and instead they should focus on the overnight interbank lending or repo rate that will be brought into line with the central bank’s overnight lending rate.
The move acknowledges the growing importance of the overnight lending rate that was introduced as part of the bank’s new policy framework in October 2011. An interest rate corridor with a ceiling and bottom rate was created and the bank could adjust rates daily within that corridor in order to deter too much speculative capital. The corridor was considered successful in helping control hot money.
While the Turkish central bank cut its one-week repo rate twice this year (April and May) in response to slowing growth, it has only used the overnight lending rate in recent months in response to the volatile market conditions since May.
In July and August, for example, the central bank raised its overnight lending rate by a total of 125 basis points while maintaining the one-week repo rate.
Through the first 47 weeks of this year, central banks have cut their policy rates 105 times, or 19.0 percent of the 552 policy decisions taken by the 90 central banks followed by Central Bank News.
This is down from 23.27 percent and the end of the previous week and down from 25.3 percent after the first six months of the year.
Roughly one-third (31.4 percent) of this year’s rate cuts have been carried out by emerging markets’ central banks while central banks in advanced economies account for less than one-tenth (8.6 percent) and banks in frontier markets account for one-fifth (19.0 percent).
In addition to Chile, Turkey, South Africa and Nigeria, Japan's central bank also met last week, continuing its aggressive monetary easing.
LAST WEEK’S (WEEK 47) MONETARY POLICY DECISIONS:
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| TURKEY | EM | 4.50% | 4.50% | 5.75% |
| NIGERIA | FM | 12.00% | 12.00% | 12.00% |
| CHILE | EM | 4.50% | 4.75% | 5.00% |
| JAPAN | DM | N/A | N/A | 0.10% |
| SOUTH AFRICA | EM | 5.00% | 5.00% | 5.00% |
This week (week 48) eight central banks are scheduled to hold policy meetings, including Israel, Angola, Colombia, Hungary, Thailand, Brazil, Fiji and Trinidad and Tobago.
| COUNTRY | MSCI | DATE | CURRENT RATE | 1 YEAR AGO |
| ISRAEL | DM | 25-Nov | 1.00% | 2.00% |
| ANGOLA | 25-Nov | 9.75% | 10.25% | |
| HUNGARY | EM | 26-Nov | 3.40% | 6.00% |
| COLOMBIA | EM | 26-Nov | 3.25% | 4.50% |
| THAILAND | EM | 27-Nov | 2.50% | 2.75% |
| BRAZIL | EM | 27-Nov | 9.50% | 7.25% |
| FIJI | 28-Nov | 0.50% | 0.50% | |
| TRINIDAD & TOBAGO | 29-Nov | 2.75% | 2.75% |
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