This week’s interest rate meetings in the developing world are highlighting that despite slower economic growth, inflation remains a problem for many countries. In some cases it could constrain policymakers from cutting interest rates, or least from cutting as much as they would like.
Take Turkey. Its central bank surprised some on Tuesday by only cutting the upper end of its overnight interest rate corridor: many had interpreted recent comments by Governor Erdem Basci as a sign the lower end, the overnight borrowing rate, would also be cut. That’s because the central bank is increasingly concerned about the lira, which has appreciated more than 7 percent this year in real terms. But the bank contented itself by warning markets that more cuts could be made to different policy rates if needed (read: if the lira rises much more).
But inflation, while easing, remains problematic. On the same day as the policy meeting, the International Monetary Fund recommended Turkey raise interest rates to deal with inflation, which was an annualised 9.2 percent in September. The central bank’s prediction is for a year-end 7 percent rate but that is 2 percentage points higher than its 5 percent target. So the central bank probably was sensible in exercising restraint.
There are other, Turkey-specific risks too. Tim Ash at Standard Bank says:
The message is that it is still a little early to put the foot to the floor on the gas again, when the current account deficit remains large, and financing risks are still considerable.
The other big meeting this week is in South Africa where the central bank, SARB, is likely to leave its interest rates unchanged at 5 percent on Thursday, despite dismal economic growth numbers. Data today showed headline price growth was a higher-than-expected 5.6 percent in October, close to the upper end of the SARB’s 3-6 percent target band. With inflation sticky, the central bank simply cannot risk weakening the rand any further with a rate cut. The currency has already fallen 10 percent against the dollar this year. From Danske Bank: