US President Donald Trump’s bruising blast of tariffs last week has thrown emerging market central banks a fresh curve ball with many now forced to make the tough choice between supporting economic activity and keeping fragile currencies stable.
Economies such as India and Indonesia had until now taken a cautious approach to interest rate cuts, keen to avoid the kinds of market meltdowns that have roiled their economies in past decades.
However, some of those market stability concerns are now taking a back seat as policymakers grow more worried about economic fundamentals. Analysts said that means some emerging market central banks could cut rates more aggressively than a more ambivalent US Federal Reserve.
Photo: Francis Mascarenhas, Reuters
"I think that this kind of reconfiguration of economic priorities is likely to mean local currencies could face more headwinds this year as their banks shore up growth through easing monetary policy," Invesco Asset Management Ltd global market strategist for Asia Pacific David Chao (趙耀庭) said.
This meant that central banks in Asia, for the first time, could be easing ahead of the Fed, Chao added.
Emerging markets have historically been extremely vulnerable to sharp interest rates divergence with the US, which has triggered capital flight often with destabilising political and economic consequences.
Worsening already battered investor confidence last week were comments from Fed Chair Jerome Powell that suggested the bank would be in no rush to cut rates further, even as global markets tumbled.
That "wait and see" approach is a stark contrast to market pricing, which shows expectations for almost five quarter-point cuts in US rates this year.
To be sure, many emerging markets over the past decades made their systems more resilient by building up foreign exchange reserves, heightening market surveillance and increasing fiscal discipline.
India delivered its first rate cut in five years in February but has in recent months also sought to mitigate a cash crunch in its banking system through liquidity injections rather than more rate cuts, which would pressure the rupee.
Tariffs, however, have changed that. India’s central bank is widely expected to cut rates by at least 25 basis points this week although the tariffs have now raised expectations of a deeper cut and another 50 basis points in rate cuts during the year.
The challenges for emerging markets vary widely across regions and globally.
Indonesia, Southeast Asia’s largest economy, faces bigger constraints around rate cuts with its rupiah currency approaching lows not seen since the Asian financial crisis in 1998, weighed in part by investor concerns about the government’s spending plans.
The government is expected to intervene heavily to defend the currency when markets reopen after an 11-day holiday today.
"A sharply weaker rupiah will likely result in a much longer pause in policy rates than would otherwise be the case, even if the bias is still to cut rates over time," Mitsubishi UFJ Financial Group senior currency analyst Michael Wan said.
In Latin America, where most countries emerged with comparatively lower tariffs, central banks have broadly in recent months and years frontrun the Fed. However, the latest events will limit further room to manoeuvre.
Brazil could find itself in a particularly challenging situation as it seeks to manage unanchored inflation expectations after spending plans last year stoked fiscal concerns, sending the real currency to a record low.
Its central bank last month hiked rates by 100 basis points for the third consecutive time.
The Bank of Mexico, on the other hand, cut rates last month and warned of heightened uncertainty due to trade tensions amid a weakening economy. Mexico was not included in the slew of tariffs announced by Trump on Wednesday, but still faces previously announced 25 percent duties on a range of products.
"If you have lower growth, central banks, depending on whether they care about something else, should be cutting rates. But that might have an impact on the exchange rate that they don’t want," said Aurelie Martin at asset manager Ninety One, adding that she expected Asia and Mexico to be most affected.
"Many countries will likely have to face the dilemma again on whether they want to cut or hike into a recession."
The new risks from last week’s tariffs, however, are creating even less favourable tradeoffs for many policy deliberations than was the case before.
South Korea, no stranger to financial crises, is also expected to face pressure to open its fiscal and monetary spigots more quickly but remains acutely aware of the risks of doing so in its highly leveraged economy.
"There are talks about economic stimulus policies and there certainly is a need for those, but we need to make sure they do not undermine what we have achieved in the last two to three years over household debt," Bank of Korea Governor Rhee Chang-yong said last week after the tariff announcement.
SELL-OFF: Investors expect tariff-driven volatility as the local boarse reopens today, while analysts say government support and solid fundamentals would steady sentiment Local investors are bracing for a sharp market downturn today as the nation’s financial markets resume trading following a two-day closure for national holidays before the weekend, with sentiment rattled by US President Donald Trump’s sweeping tariff announcement. Trump’s unveiling of new “reciprocal tariffs” on Wednesday triggered a sell-off in global markets, with the FTSE Taiwan Index Futures — a benchmark for Taiwanese equities traded in Singapore — tumbling 9.2 percent over the past two sessions. Meanwhile, the American depositary receipts (ADRs) of Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the most heavily weighted stock on the TAIEX, plunged 13.8 percent in
A wave of stop-loss selling and panic selling hit Taiwan's stock market at its opening today, with the weighted index plunging 2,086 points — a drop of more than 9.7 percent — marking the largest intraday point and percentage loss on record. The index bottomed out at 19,212.02, while futures were locked limit-down, with more than 1,000 stocks hitting their daily drop limit. Three heavyweight stocks — Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), Hon Hai Precision Industry Co (Foxconn, 鴻海精密) and MediaTek (聯發科) — hit their limit-down prices as soon as the market opened, falling to NT$848 (US$25.54), NT$138.5 and NT$1,295 respectively. TSMC's
In a small town in Paraguay, a showdown is brewing between traditional producers of yerba mate, a bitter herbal tea popular across South America, and miners of a shinier treasure: gold. A rush for the precious metal is pitting mate growers and indigenous groups against the expanding operations of small-scale miners who, until recently, were their neighbors, not nemeses. “They [the miners] have destroyed everything... The canals, springs, swamps,” said Vidal Britez, president of the Yerba Mate Producers’ Association of the town of Paso Yobai, about 210km east of capital Asuncion. “You can see the pollution from the dead fish.
ASML Holding NV, the sole producer of the most advanced machines used in semiconductor manufacturing, said geopolitical tensions are harming innovation a day after US President Donald Trump levied massive tariffs that promise to disrupt trade flows across the entire world. “Our industry has been built basically on the ability of people to work together, to innovate together,” ASML chief executive officer Christophe Fouquet said in a recorded message at a Thursday industry event in the Netherlands. Export controls and increasing geopolitical tensions challenge that collaboration, he said, without specifically addressing the new US tariffs. Tech executives in the EU, which is
RSS