February
22, 2002, 8:20 a.m. Easing
Does It
Emerging
markets are lowering interest rates . . . a good development.
ince
the beginning of this year, many emerging markets around the globe have
begun lowering interest rates. This is a good development, and one that
could enhance growth prospects worldwide.
Here's some background
to the cuts. During 2001, many emerging-market countries suffered from
recession and currency weakness. While the U.S., Europe, and the U.K.
reduced interest rates in 2001 — dramatically in the case of the
U.S. — many emerging markets had to either maintain their interest
rates or raise them in an effort to protect their currencies and the lean
against capital outflows.
With the U.S. beginning
to recover, emerging markets are now getting the opportunity to reduce
interest rates. Here's the scorecard:
China cut the 1
year lending rate by 0.54% to 5.31% and the one year deposit rate by
0.27% to 1.98% on February 20.
Brazil cut the
Selic rate by 0.25% to 18.75% on February 20.
Chile has cut the
benchmark nominal interest rate by 0.5% twice since the beginning of
the year, bringing it down to 5.5%.
Turkey cut the
interbank rate by 2% to 57% on February 19.
The Philippines
cut the overnight repo rate by 0.25% to 7.5% on February 15
Poland cut the
intervention rate by 1.5% to 10% on January 31.
Czech Republic
has cut its 2-week repo rate by 0.25% twice since the beginning of the
year, bringing it down to 4.25%.
Of course, the global
environment is still a challenging one for emerging markets.There is still
weak nominal growth, low commodity prices, and a stubborn tendency toward
deflationary strength in the U.S. dollar. But even these factors are beginning
to improve, and the news on interest rates is a real positive.
Lower interest rates
improve growth prospects — strengthening the currency, attracting
foreign investment, and allowing more interest-rate cuts. But this virtuous
circle is heavily dependent on a currency-oriented focus for monetary
policy, and we're not yet at the point where there is a broad reallocation
of capital flows to emerging markets.
Just as the U.S.
economic recovery is a piece-by-piece process, the recovery in emerging
markets will be too.
China, Korea, and Taiwan are already seeing capital inflows, currency
stability or strength, and an increase in international reserves. For
many other countries, two key issues remain: the strength of the U.S.
and European recoveries, and the issue of whether their currencies and
international reserves will respond positively to the interest-rate cuts.
So how does the global
investor proceed? Investors should look for countries which achieve stable
or strengthening currencies, increasing international reserves, and then
use repeated interest-rate cuts to raise their growth expectations. That's
the winning formula.
— Mr.
Malpass is the Chief International Economist for Bear Stearns.
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ince
the beginning of this year, many emerging markets around the globe have
begun lowering interest rates. This is a good development, and one that
could enhance growth prospects worldwide. 
