Photo Credit: AFP/Getty Images/Yuri Cortez
Just as the central banks in the rich countries have taken to unorthodox policies to boost money supply to keep their economies from falling into recession, so are those in emerging economies. But to a different end. Their concern is that yield-chasing investors will pump money into their countries, and that these speculative inflows will as rapidly reverse direction once interest rates start to rise again in the developed economies.
Hence the seemingly counterintuitive cuts in interest rates in the face of rising inflation in countries such as, most recently, Mexico. Turkey, Poland and Hungary have played a similar hand. The gamble is that inflation, though rising, is doing so tamely enough that it can be contained within acceptable limits while the low rates will keep speculators at bay. That seems a better bet than risking a currency shock once their currency, having being run up on the back of speculative inflows, crashes down again when the speculators depart, possibly in concert with an asset bubble bursting.
Brazil, facing the same problem, imposed capital controls as well as lowering rates, but after the event, and has not been able to keep inflation in check, as the latest figures show. Mexico’s finances are in better shape than Brazil’s, and it has got its retaliation in first, so to speak. The test will be if central bank governor Agustin Carstens (above) holds his nerve and cuts rates again if the peso does appreciate.
