Signs of Decoupling in Monetary Policies Between Advanced and Emerging Countries Begin to Emerge

US and UK Hold Interest Rates Steady... Brazil, Turkey, and Russia Simultaneously Raise Rates
Emerging Markets Face Rising Inflation Pressure... Strong Dollar Also Weighs on US Economic Recovery Expectations

[Asia Economy Reporter Park Byung-hee] The decoupling of monetary policies between advanced and emerging countries is becoming more pronounced. On the 17th (local time), the United States and on the 18th, the United Kingdom kept their benchmark interest rates unchanged, while Brazil, Turkey, and Russia simultaneously raised their benchmark interest rates on the 18th and 19th.

The U.S. central bank, the Federal Reserve (Fed), held its regular monetary policy meeting, the Federal Open Market Committee (FOMC), on the 17th and, as expected, kept the benchmark interest rate unchanged at the current 0?0.25%. The next day, the Bank of England (BOE) also kept its benchmark interest rate steady at 0.1%.

On the same day, the Central Bank of Brazil raised its benchmark interest rate from 2% to 2.75%. This is Brazil's first rate hike in six years since 2015. Market experts had expected a 2.5% increase, but the rate was raised by a larger margin than anticipated.

Also on the same day, the Central Bank of Turkey sharply raised its benchmark interest rate from 17% to 19%. The market had expected a 1 percentage point increase, but the actual hike was twice as large. Turkish President Recep Tayyip Erdo?an, who opposed the rate hike, abruptly dismissed Central Bank Governor Naci A?bal on the 20th, sparking political controversy.

US Federal Funds Rate Trends

UK Base Interest Rate Trends

Russia also defied market expectations of keeping rates steady on the 19th and raised its benchmark interest rate from 4.25% to 4.5%.

The reason Brazil, Turkey, and Russia simultaneously raised their benchmark interest rates is due to inflationary pressures. Brazil's consumer price inflation rate in February was 5.2%, significantly exceeding the central bank's target of 3.75%. Turkey's February consumer price inflation rate was 15.6%, more than three times the central bank's target of 5%. Russia's central bank inflation target is 4%, but the February inflation rate was 5.7%.

On the other hand, the Fed stated that inflation risks are not yet significant, and the BOE announced that it has no plans to tighten monetary policy until the 2% inflation target is achieved.

Globally, large-scale fiscal spending was implemented to overcome the economic crisis caused by COVID-19, and the resulting increased liquidity has driven up asset prices such as commodities, with inflationary shocks hitting emerging countries first.

As the United States has embarked on a massive $1.9 trillion stimulus package, there is a possibility that investment funds will flow into the U.S. this year, which is a burden for emerging countries. The Fed expects the U.S. economic growth rate this year to reach 6.5%, the highest since 1984. This rosy economic growth outlook for the U.S. could become a black hole attracting investment funds worldwide. As investment funds flow into the U.S. and the dollar strengthens, emerging market currencies may weaken, increasing inflationary pressures in emerging countries.

Trend of Brazil's Base Interest Rate

Trend of Turkey's Base Interest Rate

Trend of Russia's Base Interest Rate

In fact, since the beginning of this year, the Brazilian Real and Turkish Lira have weakened by around 5% against the dollar until just before their monetary policy meetings. With the benchmark interest rate hikes at these meetings, the depreciation of the Real and Lira has temporarily stabilized.

According to the U.S. Treasury's Treasury International Capital (TIC) report, foreign investors purchased $49 billion worth of U.S. bonds in January, the largest purchase volume in six months. This indicates that investment funds are already beginning to flow into the U.S. financial market in anticipation of economic recovery. The sharply rising U.S. bond yields this year may also attract investment funds.

The Organisation for Economic Co-operation and Development (OECD) analyzed that the rise in U.S. Treasury yields could accelerate capital outflows from emerging countries, delaying their economic recovery.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said in a speech to the European Union (EU) Parliament on the 22nd of last month, "The Great Lockdown of 2020 could turn into the Great Divergence of 2021," expressing concern that the gap between rich and poor countries caused by COVID-19 could widen.

This content was produced with the assistance of AI translation services.