After months of volatility from May through September when investors thought the Fed was going to tighten the spigot, there is a now sense of relief among emerging market central banks that they can turn their attention to domestic concerns rather than defend their currencies from the onslaught of global markets.
And yet, the selloff in emerging market assets this summer once again reminded central banks of their “vulnerabilities to sudden shifts in the external environment,” as Reserve Bank of India Governor Raghuram Rajan said this week, and how often the policy of emerging market central banks is hostage to U.S. policy.
Barely a week goes by without policy makers questioning how to improve global monetary cooperation and how the spillover from U.S. monetary policy to other countries can be reduced while at the same time maintaining an independent policy.
This week saw Bank of Mexico Governor Agustin Carstens in New York describe the outflows from emerging markets as "even more violent than after the Lehman collapse in 2008," while Bank of Thailand Governor Prasern Trairatvorakul in Bangkok raised the prospect that some countries that raised rates to stem capital flows may have ended up tightening monetary policy more than intended “as a result of tensions caused by policy spillovers.”
But it is not just U.S. monetary policy that spills over to the rest of the world, it is also dysfunctional U.S. politics, as the recent last-minute deal on the U.S. debt limit brought home.
In his speech to a joint Bank of Thailand, International Monetary Fund conference, Trairatvorakul noted that the continuation of the U.S. dollar’s role as a safe, international reserve currency rests on certain requirements, including “a good track record of prudent macroeconomic policy,” and “one cannot separate the status of a reserve currency from the solvency of a sovereign.”
“The use of the US dollar as an international store of value and medium of exchange very much depends on the continued credibility of the US Treasury in honoring its debt obligations,” Trairatvorakul said, reminding U.S. politicians of the long-term consequences of another debacle over the U.S. debt limit early next year.
While India and Hungary changed their rates last week, along with a rate cut by the Bank of Central African States, seven banks maintained their rates, including Israel, Angola, the United States, Japan, Fiji, Egypt and New Zealand.
Last week’s two rate cuts boosted this year’s number of rate reductions to 98, or 23.2 percent of this year's 422 policy decisions by the 90 central banks followed by Central Bank News. This is slightly down from 23.4 percent the previous week and below 25.3 percent after the first six months of the year.
Rates have been raised 23 times so far this year, accounting for 5.45 percent of this year’s rate decisions, up from 5.3 percent the previous week and 4.7 percent at the end of the first half.
LAST WEEK’S (WEEK 44) MONETARY POLICY DECISIONS:
This week (week 45) 15 central banks are scheduled to hold policy meetings, including Uganda, Australia, Kenya, Morocco, Romania, Georgia, Iceland, Poland, Serbia, Malaysia, the United Kingdom, the European Central Bank, the Czech Republic, Peru and Russia.
The main focus on the Bank of England this week is not on the outcome of the Monetary Policy Committee's meeting, but on next week’s release of the BOE's quarterly inflation report. The report is expected to reflect the improving economy, with the unemployment rate falling to the BOE’s 7.0 percent threshold sooner than currently forecast and thus paving the way for a possible increase in its policy rate before mid-2016.
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|
|RUSSIA (NEW RATE)||EM||8-Nov||5.50%||8.25%|