Emerging market central banks have clearly taken to heart the recent IMF warning that there is “an alarmingly high risk” of a deeper global growth slump.
Two central banks have cut interest rates in the past 24 hours: Brazil extended its year-long policy easing campaign with a quarter point cut to bring interest rates to a record low 7.25 percent and the Bank of Korea (BoK) also delivered a 25 basis point cut to 2.75 percent. All eyes now are on Singapore which is expected to ease monetary policy on Friday while Turkey could do so next week and a Polish rate cut is looking a foregone conclusion for November.
South Africa, Hungary, Colombia, China and Turkey have eased policy in recent months while India has cut bank reserve ratios to spur lending.
The BoK’s explanation for its move shows how alarmed policymakers are becoming by the gloom all around them. Its decision did not surprise markets but its (extremely dovish) post-meeting rhetoric did. The bank said both exports and domestic demand were “lacklustre”. (A change from July when it admitted exports were flagging but said domestic demand was resilient) But consumption has clearly failed to pick up after July’s surprise rate cut — retail sales disappointed even during September’s festival season. BoK clearly expects things to get worse: it noted that ” a cut now is better than later to help the economy”.
Analysts argue that more EM central banks could and should cut interest rates. After all, developed rates are rock bottom and falling (Australia cut rates last week and Japan is expected to ease policy again at the end of October). ING’s chief EEMEA economist Simon Quijano-Evans urges central banks in emerging Europe, especially Poland, to follow the example of Brazil and Korea. He notes: