“Relative price adjustments should not be confused with fragility,” added Mr Tombini, referring to the 15 per cent depreciation of the Brazilian currency 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.”
Amigo, this another one on the series: Normal countries do the normal thing.
Pressure mounts on EM nations to lift rates
By John Paul Rathbone and Jonathan Wheatley in London
Emerging market countries faced fresh pressure on Monday to put up interest rates as Brazil warned that others would need to follow its lead in tightening monetary policy and Turkey’scentral bank convened an emergency rate-setting meeting.
Alexandre Tombini, Brazil’s central bank governor, said the “vacuum cleaner” of rising interest rates in the developed world would suck money out of emerging markets and force other central banks to tighten policy to beat inflation.
The sell-off continued on Monday with emerging market currencies and global equities hit again. The Brazilian real tumbled to its weakest level in five months while the Turkish lira fell by 2.7 per cent to a new low of T2.39 against the dollar.
The Turkish currency rebounded after the central bank said it would hold an extraordinary meeting at midnight on Tuesday, 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 this month, while the Wall Street’s “fear index”, the CBOE Vix, was up another 2 per cent and on track for a three-month high.
The FTSE Eurofirst 300 fell 0.8 per cent to a one-month low, while the FTSE 100 shed 1.7 per cent. The Nikkei 225 in Tokyo tumbled 2.5 per cent to its lowest close since mid-November.
The 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, ending the recent period of superabundant global liquidity.
Mr Tombini said this normalisation of world interest rates was ultimately a good thing for emerging markets because it reflected economic recovery taking hold in the developed world. He added that Brazil was ahead of the curve.
“We are great defenders of this process” even if it brought bouts of volatility, such as last week’s currency gyrations, he told the Financial Times.
“Relative price adjustments should not be confused with fragility,” added Mr Tombini, referring to the 15 per cent depreciation of the Brazilian currency 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.
I see some emerging markets that have issues. Investors have been expecting corrections there. So there will be jitters and volatility, yes, but also differentiation- Luis Videgaray,Mexico’s finance minister
The market turmoil of the past week leaves investors facing a choice of staying the course in various asset classes, or liquidating positions in case the climate deteriorates. Currency weakness or any sign of banking system stress could force investors towards the exit, analysts said.
“Currency risk is now firmly part of the equation,” said Alan Ruskin, strategist at Deutsche Bank.
Luis Videgaray, Mexico’s finance minister, said he did not believe recent market volatility heralded a crisis. “I see some emerging markets that have issues. Investors have been expecting corrections there,” he said. “So there will be jitters and volatility, yes, but also differentiation.”
Mexico also saw the prospect of higher US rates “as fundamentally good news as it means the US economy is doing better”, Mr Videgaray added.
In one of the world’s most aggressive tightening cycles, Brazil has raised interest rates by 325 basis points since last April to 10.5 per cent to damp inflation running at almost 6 per cent, against a 4.5 per cent target. It has also used its $360bn of foreign reserves to smooth exchange rate volatility.
Although higher interest rates have trimmed growth forecasts – Brazil’s economic expansion is expected by the market to be just 1.9 per cent this year – Mr Tombini said he had faced no political pressure not to raise rates, contrary to some investors’ perceptions. He added: “We would certainly adjust policy again if need be.”
However, “the transition [to higher world interest rates] may not be synchronised, so the ‘vacuum cleaner’ will not be working at full force”, he said. “The US and the UK are quite advanced. Europe less so. And then there is Japan.”
Mr Tombini said he did not expect much fallout for Brazil from Argentina’s economic problems because its neighbour, Brazil’s second-largest trade partner, no longer had a big presence in financial markets following its near $100bn default 12 years ago.
He also put a spin on the Argentine peso’s devaluation of almost 20 per cent this year, saying it could ease sometimes prickly trade relations between the two countries. “If it makes Argentina more comfortable with its more competitive currency level, it might also be less ready to use non-tariff barriers.”
However, Mr Tombini acknowledged that Brazil had to do more to counter its sometimes poor image among international investors, who have grouped it as a member of the “fragile five” – countries such as Turkey and India that also have high current account deficits. Brazil’s approaches 4 per cent of gross domestic product.
“Foreign direct investment covers 79 per cent of the deficit, the economy is rebalancing towards investment and away from consumption?.?.?.?our policy response has been very classical and straightforward,” he said. “I do not lose any sleep over Brazil’s current account deficit.”
Additional reporting by Michael MacKenzie in New York
Copyright The Financial Times Limited 2014. |
|
