LONDON Oct 8 After a stormy year for global
emerging markets, one long-term casualty may be the decade-long
push for central banking free from politics and the
inflation-busting kudos that earned.
Investors see governments once more intent on pumping up
economic growth via low interest rates even at the risk of
inflation and currency volatility.
The trend is effectively rolling back more than 10 years of
growing consensus on the benefits of inflation targeting and
greater rate-setting autonomy across emerging markets.
Efforts by central banks such as India's and Turkey's to
support currencies over the past few months were widely seen as
hobbled by government pressure - direct or indirect - to keep
interest rates low, especially if elections are near.
"We are definitely seeing more pressure on central banks ...
Turkey is one place where the government influence (on central
banking) has become quite large," said Christian Keller, head of
EEMEA research at Barclays in London.
Keller said such attitudes had been implicitly encouraged by
the blurring of fiscal-monetary policy lines in the West, where
the U.S. Federal Reserve and its peers are busily printing money
and buying bonds to cap government borrowing costs.
But whatever the outcome in the developed rich world, the
erosion of central bank autonomy could lead to deeper damage in
developing economies, where dependence on foreign finance and
histories of high inflation exaggerate investor suspicions.
"Though the Fed is not doing (money-printing) because of
pressure from the Senate, EM governments are using it as a
pretext to say: 'They are doing it, so should we'," Keller said.
"The tricky part is that emerging markets do have cyclically
weak growth and that puts central banks in a dilemma. Growth is
too weak to please governments but currency weakness is starting
to pass through into inflation."
In Turkey, for instance, lira weakness is driving up the
cost of imported goods. Data shows annual inflation at almost 8
percent, approaching the double-digit levels that prevailed for
two decades before 2004.
Brazil's inflation has exceeded 4.5 percent, the centre of
the target range, for three years - partly due to a
15-month-long rate-cutting cycle that slashed rates to record
Rates are rising now but many see this as stemming from the
government's wariness of inflation before 2014 elections.
Over the past decade, developing countries have allowed
central banks a wider latitude in setting rates, recognising
benefits in politically neutral monetary policy.
A 2008 IMF working paper rated emerging economies highly on
independence and transparency compared with a decade earlier.
The study scored Brazil 0.5 on a 0-1.0 independence scale,
from 0.2 between 1980-89. Peru, Poland and Philippines rose to
around 0.8 from 1980s scores of 0.1 to 0.4. Turkey's score
improved to 0.8 from 0.4 in 1989.
The rewards have been substantial. Twentieth century-style
hyper-inflation is in abeyance. Policy predictability has driven
a boom in emerging local currency bonds - a $7 trillion market
of which international investors own a third.
While the study has not been updated, applying its criteria
- central appointment procedures, resolving conflict between
banks and governments, adherence to explicit policy targets, and
rules limiting lending to government - shows central bank
autonomy has slid, in emerging as well as developed countries.
That may not necessarily be detrimental. Credit Suisse
economist Kasper Bartholdy says lesser central bank autonomy may
be good for an economy like Hungary where high interest rates
had hobbled growth.
"(Hungary) have a less independent central bank and as a
result they have more sensible policies," Bartholdy said.
Hungary's central bank was rated highly independent in the
2008 study, but the government has now grabbed control of the
board and named economy minister Gyorgy Matolcsy as governor.
Interest rates have fallen by 340 basis points since.
"The standard view is an independent central bank will be
more rational (but) there is nothing to say that will always be
true," Bartholdy said. "You need some coordination between
fiscal and monetary policy."
And with a few exceptions, emerging markets do not currently
have a major inflation problem. Consumer inflation for 54
countries was 4.4 percent in August on a GDP-weighted basis,
well below long-term averages, according to Capital Economics.
"It's hard to demand big rate hikes when growth is a bigger
threat," said UBS strategist Manik Narain. "If inflation comes
back during the recovery, policymakers' credibility may be
called into question. But that's tomorrow's problem."
It could still be a big one. New Reserve Bank of India boss
Raghuram Rajan, who stunned markets by raising interest rates at
his first meeting as governor last month, has warned central
bank policies could fuel fresh asset bubbles.
The new governor of Russia's central bank, a former Kremlin
advisor, has so far defied calls for rate cuts.
And once the comfort blanket of Fed money-printing is yanked
away, investors will punish policy slippage, especially in
countries such as Indonesia where foreigners own a big chunk of
the bond market, or India, where government borrowing is high.
"There will always be a tendency for ... the government to
inflate their way out of the mess," says Abheek Barua, chief
economist at India's HDFC Bank. "So you need a reasonably
assertive monetary authority, who ... puts its foot down and
says enough is enough, inflation is spinning out of control."
(Additional reporting by Carolyn Cohn in London and Tony Munroe
in Mumbai; Editing by Ruth Pitchford)