The economic turbulence in emerging markets has generated a similar response from the countries hit hardest: protect their currencies against the dollar (rather than stabilize them). South Africa, Turkey and India have all raised their interest rates. Since inflation is generally high in these nations, the hikes don’t seem all that insane (but in an election year, as it is for all three countries, every move could have devastating consequences).
The U.S. Federal Reserve appears to agree with that idea: today it announced that the U.S. central bank is sticking with its plan to reduce its stimulus program. However critics say that the Fed is only accentuating it. The opinion that the Fed is the initial malefactor of the emerging market crisis — as economists and analysts are dubbing it — is generally agreed upon global market analysts. The Fed’s move indicates how the U.S. is following its own path to recovery, undeterred by the risk of capital flight and global currency issues.
South Africa’s central bank was the latest to join the club of emerging market rate-hikers, and probably the least-expected entrant. On January 29 the nation’s Reserve Bank elevated its main interest rate to 5.5% from 5% due to the depreciation of the rand exchange rate — it had lost 25% against the dollar in the last eight months. This decision came hours after what has been the most revealing rate hike of all: Turkey boosting its main policy interest rate from 4.5% to 10% after weeks of reluctance to raise it at all. Prime Minister Erdogan, a well-known critic of high rates, even had something reportedly backed the rate hike. And Monday saw the Reserve Bank of India (RBI) unexpectedly raised the benchmark on Monday. Governor Raghuram Rajan increased the repurchase rate to 8% from 7.75%. Easing consumer price inflation is the bank’s main goal, since it will revive consumption and investment in the country — a must if India is to regain its lost global competitiveness.
What emerging economy will raise its interest rate next? Unclear; what is clear is that the financial crisis’ aftershocks remain a threat. The U.S. economy is doing better — a good sign for these countries, as they have correspondingly greater export opportunities. But all this goes to show that emerging economies need to focus their policies less on fine-tuning rates – foreign exchange markets will continue to go up and down – and more on building a base for long-term growth. You can’t fight your way out of uncertainty and structural weaknesses with monetary tweaking.