Path open for more interest rate cuts

Bloomberg

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In the past week, the Turkish, Hungarian and Malaysian central banks have carried out unexpected cuts to their key rates.

As the Turkish lira, forint and the ringgit have held up, policy makers in Poland, Mexico, South Africa and Brazil, the next in line to meet in coming weeks may be more tempted to ease rates, Beat Siegenthaler, the London-based chief strategist for emerging markets at TD Securities, wrote in a note to clients.

"Sharply slowing economic activity is obviously a concern for any emerging-market central bank but fear that monetary easing would lead to weaker currencies has been a key reason for many to remain hawkish," Siegenthaler wrote. "The unexpected rate cuts have not led to currency weakness, which may well encourage copy cats elsewhere."

Emerging markets have been scorched by the global credit crisis as investors dumped riskier assets in a flight to safety.

Turkish lira, or YTL, declined 31 percent and the forint tumbled 13 percent in the six weeks after the Sept. 17 collapse of Lehman Brothers Holdings as global money markets seized up.

Central banks in developing nations are rethinking their priorities after a simultaneous recession in the U.S., Japan and the euro region spreads to developing nations and sliding commodity prices ease inflation pressures worldwide.

The Turkish Central Bank lowered its overnight borrowing rate half a point to 16.25 percent on Nov. 19.

The Hungarian central bank on Nov. 24 unexpectedly cut the European Union’s highest benchmark interest rate to 11 percent from 11.5 percent as it starts to roll back last month’s emergency increase.

The bank was forced to raise rates by 3 percentage points on Oct. 22 to defend the forint.

Malaysia’s central bank three days ago reduced interest rates for the first time since 2003, lowering its benchmark a quarter point to 3.25 percent.

The YTL rallied in the last four days, reaching a two-week high of 1.5602 per dollar Tuesday. It was at 1.5946 at 2:43 p.m. in Istanbul yesterday.

The banks cut rates even as Turkey is negotiating with the International Monetary Fund about a loan worth between $20 billion and $40 billion to help shore up the currency and meet its financing needs.