Emerging central banks step in to curb sharp currency falls

Steep falls in emerging market currencies have spurred central bankers into action

Steep falls in emerging market currencies have spurred central bankers across the developing world into action to try to stem the weakness.

A JPMorgan index tracking 22 emerging market currencies has hit record lows, and with the US Federal Reserve set to raise interest rates this year, more weakness likely lies ahead.

Policymakers in the developing world, faced with sluggish growth and shrinking exports, have so far been relatively sanguine about currency weakness. But many now appear keen to prevent volatile swings or excessive declines that could exacerbate inflation.

“Central bankers in emerging markets are finally waking up to the fact their currencies may test extreme levels over the next months, and they are starting to react to it,” Citi strategist Luis Costa told clients.

The following is a list of measures emerging central banks have undertaken to limit currency weakness:

In Kenya, the Central Bank was in the market to mop up Sh10 billion from money markets on Friday following similar operations in recent days. The tight liquidity makes it expensive to hold dollars. It has raised interest rates by a total 300 basis points (bps) since June but defied expectations for a 50 bps hike last week.

Bank of Uganda, the country’s central bank raised rates by 150 basis points to 14.5 per cent on July 13, saying it wanted to prevent a jump in inflation after the shilling weakened against the dollar. Many expect it to raise rates again today. Rates have been hiked three times since April.

In Nigeria, the central bank has directed commercial banks to pay for dollar purchases 48 hours in advance, after banning them from accepting foreign currency cash deposits to curb dollar demand. In June the bank had curbed access to the interbank currency market to preserve foreign reserves.

Russia’s central bank has stopped its dollar purchase programme and will not replenish its reserves for the rest of 2015 to reduce pressure on the rouble. On July 31, it cut interest rates by 50 basis points, its fifth cut this year but smaller than its usual installment of 100 bps. The rouble fell more than 10 percent in July.

In Brazil, the central bank said it would nearly double the number of currency swaps to roll over expiring contracts to support the real, currently at 12-year lows.

It raised rates by 50 basis points on July 29 to 14.25 per cent and plans to hold them there “for a sufficiently prolonged period”.