The central bank of Turkey boasts an impressive art collection, including a canvas by Erol Akyavas entitled “Locus of Extremity.” That was pretty much where the central bank found pitself at midnight on January 28. Turkey’s currency, the lira, had fallen by 13 percent against the dollar in the previous six weeks, one of the worst casualties of a broader sell-off in emerging-market assets.
Prices were rising (by 7.4 percent in the year to December) and yet the political pressure to suppress interest rates remained firm. At its unscheduled, nocturnal meeting, the central bank dramatically simplified and tightened monetary policy, raising what will henceforth be its key rate from 4.5 percent to 10 percent.
The Turks were not alone. Earlier that day India’s central bank also surprised people by raising rates (albeit by a less-extreme 0.25 percentage points) for the third time in five months. South Africa’s monetary authorities followed suit the next afternoon, lifting rates by 0.5 points. The trio deemed their tightening necessary to keep a lid on troublesome inflation and to give a lift to their battered currencies. But it gave their exchange rates only a fleeting lift; late on January 29 they were wobbly again.
These three economies, alongside Brazil and Indonesia, belong to the “fragile five.” Their currencies suffered dramatic declines last year, after Ben Bernanke, the chairman of America’s Federal Reserve, was tactless enough to say that it would not keep printing money to buy bonds at the same pace for ever. The beleaguered five enjoyed some respite in September, when the Fed decided to maintain its “quantitative easing” for a few months more. But in the past two weeks foreign investors have once again found reasons to sell (see chart 1).
They did not have to look too hard. In recent months Argentina has squandered a big chunk of its foreign-exchange reserves in a doomed defense of the peso, which eventually fell by about 20 percent, despite the government’s fitful efforts to curtail capital outflows. On January 23 a widely watched index of manufacturing in China fell by more than expected, raising the prospect of slowing growth amid excessive credit. In Turkey, the sons of three cabinet ministers were arrested in December in a corruption scandal. Meanwhile, in both icy Kiev and balmy Bangkok, protesters are on the streets.
These local difficulties, not all of them little, are unfolding against the backdrop of a gradual rise in global interest rates, as America’s economy strengthens and the Fed moderates its bond purchases. Yields on 10-year Treasuries are still low: about 2.8 percent. But that is more than one percentage point higher than nine months ago. At Mr. Bernanke’s last meeting as chairman, on January 29, the Fed decided to cut its monthly purchases by another $10 billion, having done the same in December.
The Fed’s bond-buying was not popular in emerging economies. Brazil’s finance minister, Guido Mantega, once accused the rich world of unleashing a currency war: the Fed’s easy money cheapened the dollar, reducing the demand for emerging-market goods. But now that quantitative easing is slowly ceasing, the developing world faces the opposite problem: the Fed’s cutbacks will cheapen American bonds, reducing the demand for emerging-market assets. Alexandre Tombini, governor of Brazil’s central bank, has likened rising rates in the rich world to a “vacuum cleaner” that will suck foreign money out of emerging economies.