A surging dollar and the highest 10-year US Treasury yields since 2011 are fueling bets that policy makers in key developing nations from India to Mexico will raise interest rates faster than economists previously anticipated.
The turnaround is led by concern that a failure to tighten monetary policy risks the possibility investors will zero in on swollen current-account deficits, spurring currency selloffs and sending inflation soaring.
The fallout is most evident in crisis-hit Argentina, which jacked up its benchmark borrowing rate to 40%, but is also pronounced in Asia, where Indonesia on Thursday tightened for the first time since 2014. Analysts also predict action in India and the Philippines.
“When the Fed’s on the move, central banks in emerging markets try to play catch-up,” said Frederic Neumann, the co-head of Asian economics research at HSBC in Hong Kong.
Indonesia lifted its seven-day reverse repurchase rate by 25 basis points to 4.5% to halt a slide in its currency. The central bank said it is ready to take stronger measures to maintain stability.
HSBC also says the Reserve Bank of India will hike rates twice this year after previously expecting no change. For the Philippines, it maintains a bias toward raising even after Bangko Sentral ng Pilipinas lifted rates this month for the first time since 2014.
Fitch Ratings says it’s inevitable that emerging markets will have to embark on tighter monetary policies over the next years, although the moves haven’t been fully priced in by investors. A study published by the firm this week showed six out of 10 major developing nations are running policies it considers too loose, most notably Turkey and Brazil.
“Policy rates could see more upwards adjustment than currently expected by financial markets as global monetary conditions normalise,” Fitch economists Brian Coulton and Maxime Darmet wrote in a report.
Some countries that were cutting rates are poised to hold off on further reductions. That is exactly what happened in Brazil, where the central bank surprisingly kept its key rate unchanged on Wednesday after twelve consecutive cuts, reneging on its own guidance. Policy makers had signaled an additional rate reduction in the previous meeting, but the emerging market rout forced a shift in the policy direction.
Fears of outflows and currency depreciation also make Africa’s central banks cautious of moving too fast and too far. Nigeria’s key policy rate has been at a record high since July 2016 and the South African Reserve Bank is unlikely to cut again this year, even with inflation at a seven-year low. Angola even raised rates in November to help support the kwanza.
Turkey’s central bank said Wednesday that it was monitoring markets and would take the necessary steps to restore confidence after the lira tumbled to a record low following President Recep Tayyip Erdogan’s declaration that he planned to take more responsibility for monetary policy.
Harvard professor and economist Carmen Reinhart says developing nations are worse off than during their two most recent moments of weakness, the 2008 global financial crisis and 2013 taper tantrum. She points to mounting debt loads, weakening terms of trade, rising global interest rates and stalling growth as reasons for concern.
“Because of rising balance-of-payments risks, the pressure is building for several central banks to hike rates sooner than we thought, even though, in some cases, inflation is benign,” Nomura analysts Andrew Cates and Rob Subbaraman wrote in a recent report.
Nations with current account surpluses are in a better position to withstand the impact of Fed interest-rate hikes than those with deficits. Inflation also remains subdued around most of the world, taking pressure off authorities.
Thailand’s central bank on Wednesday left its benchmark interest rate near a record low, and said it doesn’t feel pressure to join the global wave of tightening. China is also in a comfortable position, helped by controls on the flow of money into and out the country.
Elsewhere, though, the pressure remains for tighter policy. The Mexican central bank may hike rates as soon as Thursday, motivated by peso weakness and concerns about inflation, according to Mike Moran, the chief economist for the Americas at Standard Chartered. Most analysts surveyed by Bloomberg expect the bank to leave the rate at 7.5%.
In what is probably the most emblematic case of policy makers responding to the dollar rally and higher Treasury yields, Argentina’s central bank used an interest rate shock to try to calm markets after its currency slumped to a record low. Officials raised borrowing costs by 12.75 percentage points in just over a week to 40%, the highest in the world.
The pressures are broad based. Sri Lanka’s central bank said Thursday it is open to using its foreign reserves to support the nation’s currency.