In the last 48 hours we have seen emerging market central banks take bold decisions in order to curb severe currency weakening as turmoil in emerging markets strengthened, and investors rush towards safe haven currencies. The Reserve Bank of India was the first to get the ball rolling in a surprise move raising interest rates by 25 basis points to 8%, in a bid to fight back against inflationary pressures.
The Turkish Lira was one of the worst affected currencies as political concerns also weighed on the currency. In an emergency meeting the Turkish central bank raised all the main interest rates, in an attempt to stabilise the currency. The overnight lending rate rose to 12% from 7.75%, the overnight borrowing rate rose to 8% from 3.5% and the one week repo rate increased to 10% from 4.5%.
The South African Reserve Bank also followed suit as the nation battles with labour disputes. The bank raised its borrowing rates by 50 basis points to 5.5% in spite of the fact that inflation remains with the central bank’s target range of 3%-6%.
Despite all these efforts to prevent further currency weakness, any gains after each announcement were soon erased. The market seems to be unimpressed by central bank’s attempts to convince the markets they are ready and willing to take action. Turkey’s central bank’s move could be described as delayed, and although the SARB rate increase was unexpected, it failed to grab investors’ attention. What the market needs is to be convinced that these central banks are completely committed and engaged in consistent aggressive policy in order to ensure not just a stable currency, but also price stability.
Sasha Nugent
Currency Analyst
