Less wary of capital flight, emerging countries cut rates

11/06/2014 08:15 AST

TOKYO -- Emerging countries like Turkey and Mexico are starting to cut interest rates or forgo additional hikes, a departure from early 2014 on greater confidence that the moves will not send their currencies plunging amid persistently low rates in the U.S.

Turkey's central bank lowered its benchmark one-week repo rate by 50 basis points to 9.5% on May 22, bucking market expectations. This was its first cut in a year. And on May 28, the central bank of Brazil decided to hold off on an additional rate hike.

The currencies of both countries dropped for a time after the moves, but the declines were either relatively small or followed by a rebound.

On Friday, Mexico's central bank reduced its key overnight interest rate to a record-low 3%. The peso lost about 1% against the dollar for a time.

Still, "in light of investors' high expectations for Mexico's economy, the peso will stop falling in the medium term," says an analyst with Sumitomo Mitsui Banking.

In January, rising expectations of higher long-term rates in the U.S. caused the currencies of emerging nations with large current-account deficits to plunge, roiling their financial markets. Affected countries were then compelled to raise rates intermittently to protect their currencies. But emerging-market currencies have been on the rebound since this spring.

Fewer investors are betting that U.S. rates will rise by a wide margin soon. Long rates there are trending near 2.6%, calming fears that an emerging country's own rate cut would prompt a sudden outflow of funds.

Still, U.S. rates will rise sooner or later.

"If emerging countries don't remain steadfast in their pursuit of structural reforms like shrinking current-account deficits, they will be unable to dispel worries about their currencies sliding in the future," says Shinya Harui, foreign exchange analyst at Nomura Securities.

Asian Nikkei