An analytical exercise that was moderately popular before the financial crisis has become a mandatory task in the post-crisis years.

Author: Al Emid

Governments that raise or lower rates explain the rationale in great detail, while analysts bravely attempt to dissect the cause and effect of the rate changes.

September brought a flurry of interest rate announcements, especially the US Federal Reserve’s decision on September 17 not to change its 0.25% rate. Fed chair Janet Yellen cited several factors, including domestic financial issues, global volatility and concerns about China and other emerging markets economies.

The Fed focuses on the American economy, but the dollar’s status means that the Fed’s decisions have an impact on other countries. When it hikes rates, US-dollar-denominated investments tend to provide a greater return. That leads to a strengthening of the dollar against other currencies. Emerging markets raising funds in capital markets often conduct transactions in US dollars, but then must convert the funds to a domestic currency, thereby creating a financial squeeze.

So several emerging markets governments moved quickly after the Fed announcement, with India’s Reserve Bank reducing its rate by 50 basis points to 6.75% on September 29. The bank’s strong action (analysts had expected a cut of only 25 basis points) implies a judgment that its window of opportunity for providing monetary stimulus is likely to be fairly narrow, given the inevitable eventual uptick in American rates, according to a Bank of Nova Scotia report. The Fed’s sensitivity to domestic job numbers may mean that emerging markets have a larger window of opportunity than if job growth were to have improved substantially.

In Taiwan, the central bank reduced its policy rate from 1.875% to 1.75% on September 24, partially on the expectation of an eventual US rate hike but also as a reaction to its own slowing economy and deteriorating export numbers, which fell to just over $35 billion in August, a year- over-year drop of 8.3%, according to an analysis by Natixis. The firm says the rate cut reveals Taiwan’s worries on the domestic economic front and its large export exposure to China— drawing attention to jitters over how China’s slowdown could derail Asia’s growth.


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