Emerging markets in up-down rates muddle

October 18, 2011

Emerging market economies are starting to show a split between those raising rates to fend off runs on their currencies, and those cutting rates to spur on growth as global recession/depression talk intensifies.

Many of the larger emerging economies, like Brazil and Indonesia, have followed developed-world counterparts in cutting rates. Brazil, which had been crying over currency wars for months, complaining that U.S. money-printing has driven the Brazilian real to uncompetitively high levels, can stand the recent fall in its currency. Other countries that may follow suit with rate cuts include Thailand, Mexico and South Africa.

But in Africa, spiralling food and in some cases energy costs have triggered a run on currencies that never gained from QE in the first place. As a response, Kenya, Nigeria and Uganda have jacked up interest rates in an attempt to stem that tide.

“We cannot rule out hikes in Tanzania and Ghana,” Renaissance Capital analysts say, adding that Kazakhstan and Ukraine may also come under pressure to raise rates. Both former Soviet Union countries could suffer from falling commodity prices.

For some countries, the decision on which way to go is becoming increasingly muddling. I got two research notes on consecutive days last week — one saying Hungary was likely to raise rates to prevent forint weakness, the other that Hungary will cut to spur growth.





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