By Paul Hannon
June 22, 2019
Central banks in emerging markets around the world are cutting interest rates, with Russia the latest example, as expectations of easier money in the U.S. give developing markets the room to stimulate their economies.
The Russian central bank cited the recent change in course by the Federal Reserve toward looser monetary policyin its decision to lower its key interest rate by a quarter-percentage point to 7.5%. Bank of Russia Governor Elvira Nabiullina said a further rate cut was possible at one of the bank's upcoming board meetings.
Just six months ago, the Russian central bank had to raise interest rates to get ahead of the Fed's ninth rise in three years. Last year, tighter monetary policy in the U.S. pressured a raft of emerging markets' central banks to keep monetary policy tight.
U.S. central bank officials are now considering whether to cut rates, if not at their meeting next week, than in July or coming months.
In January, the Fed surprised investors by signaling it was done raising interest rates for now, opening the way for a series of cuts in developing countries.
U.S. monetary policy has an outsize effect on central banks in emerging markets because of its influence over global flows of capital and currency moves. When the U.S. raises rates, it encourages investors to bring their capital back home, forcing developing countries to follow—even if their economies are slowing—to keep their currencies steady and avoid a surge in inflation as the prices of imports rise.
When the Fed is easing, others can follow suit, and indeed sometimes have to avoid appreciations in their currencies that would hurt exports and push inflation down.
Since April, India, Malaysia and the Philippines all have lowered rates, while China's central bank has taken steps to encourage more bank lending. That trend is likely to broaden over coming months, particularly if the Fed cuts its key rate, as officials have signaled it may. The European Central Bank is also considering cutting rates.
The South African Reserve Bank could cut borrowing costs this summer to help counter an economic contraction there. The bank has been criticized for not slashing rates more aggressively as South Africa battles with high unemployment.
Egypt, Indonesia, Mexico and South Korean could also follow suit, analysts say.
While the global trend may be toward lower interest rates, individual countries can find themselves on the sidelines if other troubles keep their currencies under pressure.
Turkey's economy contracted in 2018, and while it returned to growth in the first three months of 2019, any recovery is likely to be anemic. However, it must keep rates relatively high to check any fall in the Turkish lira. The currency has come under selling pressure due to geopolitical and economic tensions between the U.S. and Turkey.
The task facing policy makers was further complicated Friday when Turkish prosecutors launched a criminal probe against 38 individuals, including economists and two Bloomberg reporters, for allegedly disseminating fake news and causing chaos in financial markets last summer. The probe may make investors more wary of investing in Turkish assets.
Central banks are responding to signs that the global economy is losing momentum. The World Bank expects the global economy to expand 2.6% this year, due to falling trade and investment flows, in what would be the slowest expansion since 2016.
On Friday, the Bank of Russia cut its national economic growth forecast for 2019 to between 1% and 1.5% from an earlier range of 1.2% to 1.7%.It warned that the expansion may ultimately be even weaker than that.
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