Team, Cool article here that really demonstrates relationship between interest rates and currency values. Questions: 1. When the U.S. and Europe raise interest rates, what does that do to the value of currencies and the inflation rates in emerging markets? 2. What should the central banks of countries like Brazil do in response? Financial Times Pressure mounts on EM nations to lift rates By John Paul Rathbone and Jonathan Wheatley in London Emerging market countries are facing fresh pressure to raise interest rates, after Brazil warned that others would need to follow its lead in tightening monetary policy, and Turkey’s central bank convened an emergency rate-setting meeting. Alexandre Tombini, Brazil’s central bank governor, told the Financial Times that the “vacuum cleaner” of rising interest rates in the developed world would continue to suck money out of emerging markets and force other central banks to tighten policy to beat inflation. The emerging markets sell-off continued yesterday with currencies and global equities taking a further hit. The Brazilian real tumbled to its weakest level in five months while the Turkish lira fell by 2.7 per cent to touch an all-time low of T2.39 against the dollar. The Turkish currency rebounded after the central bank said that it would hold an extraordinary meeting at midnight tonight, prompting expectations of an interest rate rise after 11 straight days of lira declines. “If there isn’t an interest rate hike there will be carnage,” said Refet Gurkaynak, an economist at Bilkent University in Ankara. By midday in New York, the S&P 500 was down 0.5 per cent, about 3.6 per cent below the record high it struck earlier this month, while the Wall Street “fear index”, the CBOE Vix, was up a further 2 per cent and on track for a three-month high. The FTSE 100 shed 1.7 per cent while the Nikkei 225 tumbled 2.5 per cent to its lowest close since mid-November. The latest market jitters were triggered by last week’s abrupt devaluation of the Argentine peso, which provided a reminder of the vulnerabilities some countries face as central banks in the developed world tighten monetary policy. Mr Tombini said the normalisation of world interest rates was ultimately positive for emerging markets as it reflected economic recovery taking hold in the developed world. “Relative price adjustments should not be confused with fragility,” said Mr Tombini, referring to the 15 per cent depreciation of the Real last year. “The Brazilian response has been very classic – tightening policy, using foreign reserves as buffers. Other countries will have to follow suit . . . some may be reluctant.” Economists said other emerging markets that could be forced to tighten monetary policy included India, Indonesia and South Africa. Luis Videgaray, Mexico’s finance minister, said he did not believe that recent volatility heralded a full-blown emerging markets crisis: “I see some emerging markets that have issues. Investors have been expecting corrections there. So there will be jitters and volatility . . . but also differentiation.” Additional reporting by Michael Mackenzie in New York The Short View, Page 13 Markets, Pages 21 & 22 Copyright The Financial Times Limited 2012. You may share using our article tools. Please dont cut articles from FT and redistribute by email or post to the web.
Posted on: Tue, 28 Jan 2014 22:33:59 +0000
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