Emerging economies are reacting to the turning tide of cheap money by introducing measures to prop up their currencies. As the U.S. Federal Reserve seeks to end its loose monetary policy, central bankers in Brazil, Indonesia, India or Turkey are struggling to keep foreign investors from fleeing their markets in search of higher-yielding assets elsewhere.
Only last week the Indian rupee fell to a record low against the dollar; Brazil’s real fell to its lowest level since 2008; and the Indonesian rupiah dropped to its lowest level against the dollar since 2009. Some economists argue that foreign-exchange markers are simply undergoing a bout of short-term volatility. Others assert that the global economy is being restructured, marked by rapidly rising borrowing costs.
There is no single remedy to ease the pain as the Fed prepares to taper its asset purchasing. Each developing economy is particular, even if the most vulnerable all have a large current-account deficit. Latin America’s largest economy’s plan stands out: a $60 billion currency intervention program.
Until the end of the year Brazil’s monetary policy will be based on currency swaps and the sale of dollar repurchase agreements amounting to $3 billion per week through. Inflation — currently above an annual rate of 6% and extremely close to the government’s 6.5% target ceiling – is Brazil’s biggest economic challenge. Policy makers are eager to not let the real’s depreciation stoke inflation further.
With international reserves of more than $370 billion, Brazil is better placed than most of its counterparts to intervene in the currency markets. India, by contrast, has imposed foreign exchange controls. Indonesia announced a package of measures to boost direct investment.
Christine Lagarde, the head of the International Monetary Fund, called on central bankers gathered at their annual Jackson Hole retreat not to end their stimulus measures soon. “Unconventional monetary policy is still needed in all places it is being used, albeit longer for some than for others,” she said.
Lagarde said the Fund was ready to support emerging countries should they need it during the course of the U.S. Fed’s stimulus exit. Though she did not voice such an opinion, that suggests that the Fund thinks it unlikely that central bankers will be able to find coherent, cooperative and cohesive responses to the next phase of global monetary policy that speaker after speaker at Jackson Hole called for.
Exiting from the “unconventional monetary policy” that the U.S. Fed has led in response to the 2008 global financial crisis may require equally unconventional policy in its aftermath from both central banks and the multilateral institutions to create less volatility in currency markets and global capital flows. Emerging countries would like to create a new framework to facilitate that through the co-ordinated management of financial spillovers.
That is unlikely to happen. Normalization of monetary policy in the rich countries will restore the primacy of domestic goals over international cooperation.