monetary policy

Two central banks surprised the world last week with unexpected hikes in interest rates in the face of panicky financial markets. Raising rates a startling 150 basis points, the Central Bank of Russia was reacting sharply to yet another week of runs on the rouble. (It fell further this week nonetheless.)

The other, the Central Bank of Brazil, increased the cost of borrowing by a more modest 25 basis points. It seemed to be attempting to re-establish its independence credentials after the previous weekend’s presidential elections and subsequent worries that economic policy would tend towards the populist and the inflationary.

Yet just as with the advanced economies’ central banks – the Bank of Japan ramping up quantitative easing just as the Fed withdraws – monetary policy has diverged rather than unified in the big emerging economies. Read more

By Márcio Garcia of PUC-Rio

Last year’s taper tantrum caused massive turbulence in global markets. Risky assets suffered greatly and many emerging markets currencies depreciated heavily, including the Brazilian real.

In response, the Brazilian central bank (BCB) decided to intervene in the foreign exchange markets. After an ad hoc beginning, from August 2013 the BCB announced a programme of sales of $2bn of exchange rate swaps every week, plus a weekly auction of $1bn in short term dollar credit lines to the banks. Read more

It has now been three weeks since the ECB moved, enough time at least to assess the effect on asset prices if not on the real economy. Will the bank’s actions benefit EMs, particularly those in central and eastern Europe (CEE) with strong financial links through which liquidity might be expected to flow? Will the ECB, as the Fed’s quantitative easing (QE) is widely acclaimed to have done, push investors grazing in the dry savannahs of developed country asset classes out into the fecund yet mysterious forests of the emerging markets in a hunt for yield?

The initial answer seems to be: not much. Neither eurozone nor emerging eastern Europe assets have exactly been set on fire by the ECB’s action. Three weeks later, the euro – which might have been expected to weaken rapidly after a big ECB easing – has largely reversed its initial moderate falls against the dollar and also against CEE currencies (of which more later). European equities first rose and then retreated. And while equities in emerging Europe had risen by about 5 per cent by mid-June, this largely seems to reflect a cooling of the Ukraine crisis, and they too have fallen back since. Read more

Brazil’s central bank holds its regular monetary policy meeting Wednesday and the market consensus has rarely been more uniform. Most analysts are forecasting a 25 basis point increase to 11 per cent in the benchmark Selic rate. Read more

It is ironic that Raghuram Rajan, governor of the Reserve Bank of India, will announce India’s latest monetary policy decision on Tuesday – April Fools’ Day.

Since taking the helm at the central bank last year, Rajan has repeatedly surprised the markets by holding the repo lending rate steady when we all expected a hike and giving us a hike when we were sure no change was on the cards. In the midst of a pre-election rally, what can we expect now? Read more

Raghuram Rajan, governor of the Reserve Bank of India (pictured), rarely fails to surprise.

He wished everyone “happy new year” with a 25 basis point hike in the repo lending rate on Tuesday – bringing it to 8 per cent – and added the woeful statement that economic growth would lose momentum in the third quarter of the current financial year.

The decision to hike rates goes against expectations, with economists in a Reuters poll last week forecasting that Rajan would hold steady. Read more

Hungary’s central bank made it 17 out of 17 on Tuesday when it trimmed its policy interest rate by 20 basis points to 3 per cent, completing a 4 percentage point reduction since the bank began cutting in August 2012.

There may still be more cuts to come. Read more

The Czech koruna plunged on Thursday after the country’s central bank surprised markets by declaring a Swiss-style policy of currency market interventions to keep the koruna near Kc27 to the euro compared to Kc25.8 prior to the announcement.

The koruna fell by more than 4 per cent, to just below the 27 to the euro mark set by the bank. Read more

Indonesia, the Philippines, Malaysia and Thailand are on the face of it a relatively homogeneous, integrated group of nations with similar trading partners. So why did the first two emerge from the 2008 financial crisis in a much better shape than the latter?

A working paper from the IMF concludes that it was because Indonesia and the Philippines were less open to trade and had greater fiscal stimuli. Read more

Raghuram “Rockstar” Rajan, the new governor of the Reserve Bank of India, proved he meant business last month when he surprised markets and raised the repo rate by 25 basis points to 7.5 per cent.

His next policy decision comes on Tuesday and many analysts are expecting another 25bp hike. So what are the signs he’ll be looking for? Read more

For the second month running and the third time this year, the Bank of Mexico has cut its key interest rate, bringing it to a new historic low of 3.5 per cent in a widely-expected move aimed at giving a boost to economic growth.

The 25 point cut followed a surprise cut of the same size on September 6 after the economy shrank in the second quarter for the first time in four years. The bank also cut by 50 basis points in March. Read more

Too much public spending, excessive reliance on domestic demand and loose monetary policy – the International Monetary Fund has made clear its concerns about Turkey in some of its harshest criticism of the country in recent years. Read more

By Gerardo Rodriguez of BlackRock

Investing in emerging markets has never been boring. Recent market volatility has spawned various comments on the future of the asset class as a whole. Stronger fundamentals have made emerging markets more resilient and safer places to invest. But the challenging external environment and imminent tapering by the Fed is exposing some of the weak spots of EMs. The adjustment of relative prices is a necessary condition for the rebalancing that is required. However, there are risks that the correction goes too far and the asset class falls into a vicious cycle. Read more

As the G20 kicks off in St Petersburg, one of its dominant themes is a rising swell of complaints over the effects of US monetary policy.

Simply put: the US tapers quantitative easing, and the days of easy money for emerging markets are over – and currencies get hit. So who’s complaining, and how bad has it been? Read more

It may or may not be a coincidence that the Turkish lira touched a record low a day after the central bank decided that defending the currency was less important that keeping interest rates in check.

But what is more important is the thinking behind Ankara’s new approach – whether it is prompted by technocratic considerations or the result of political constraints – and whether it is likely to prevail. Read more

What to make of the “big bang” from incoming governor of the Reserve Bank of India, Raghuram Rajan, as he announced a set of unexpected reforms on his first day in office?

Well, the markets have given the ex-IMF economist the thumbs up. The rupee was up 1.5 per cent to 66 to the US dollar on Thursday morning, while the benchmark Sensex index rallied 2.2 per cent to 18,971.03. Read more

After long discussion, a battle in India’s government between the imperatives of boosting the economy and supporting the currency has been decided.

Late on Monday, the Reserve Bank of India (RBI) announced a package of measures to tighten liquidity. It hopes to stem the depreciation of the rupee and prevent its current account deficit from spiralling out of control – but it has done so at the risk of limiting India’s already meager economic growth. Read more

Quantitative easing was a big factor behind growth in emerging markets after the 2008-09 crisis. And when Ben Bernanke, chairman of the US Federal Reserve, suggested last month it may be about to end, he triggered a big sell-off in EM assets.

So when Bernanke declared on Wednesday evening that “highly accommodative monetary policy” was here for the foreseeable future, it was no surprise that his comments delivered a bounce in EM markets.

But it is unlikely that EM central bankers are heaving a collective sigh of relief. Monetary policy in emerging markets has become much less dependent on Fed policy than you might think. Read more


It’s deliberate. To all intents and purposes, the Chinese authorities on Wednesday confirmed that the cash crunch squeezing the country’s banks is no market aberration but the result of considered central bank action.

By consistently withholding funding from banks, the People’s Bank of China has for the past two weeks been driving up short-term interest rates and putting pressure on overextended lenders. And there is no sign of it relenting. Read more

The Reserve Bank of India on Monday kept its key benchmark lending rate unchanged at 7.25 per cent. While it might have wanted to continue with recent cuts to boost a flagging economy, the plunge in the rupee left the central bank with little choice. Read more