Central Banks In Emerging Markets Could Be On The Come Up
Central Banks face the collective challenge of how to establish new platforms and currencies
Jamaica's central bank cut its interest rate by 50 basis points in May, the 3rd cut this year
Central banks in emerging markets can play a leading role in deepening and integrating capital markets. However, interest rate changes can make or break these emerging economies. These institutions face the collective challenge of how to oversee the rapid expansion of the global financial system and the establishment of new platforms and currencies. Just how important will deploying their own tools to support financial market infrastructures become for the future of central banks?
Why This Matters: The long period of low U.S. interest rates had a global impact as the stock of dollar-denominated debt ballooned to more than $11.5 trillion. In turn, interest rate hikes by emerging market central banks outstripped or matched cuts for nine straight months to battle the fallout from a strong dollar, rising inflation and softer currencies, Reuters reported. For emerging economies with dollar-denominated debt, the stronger dollar makes it harder to pay off loans.
Interest rates at the four major central banks which includes the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have remained historically-low for more than a decade, to give their own economies a boost. This move has caused many emerging central banks to react in a way that has pressured their own economies. For example, Jamaica's central bank cut its interest rate by 50 basis points to 0.75% on May 19, it was the third cut since the start of the year. Additionally, in a surprise move, the central bank of Nigeria cut its benchmark interest rate to 13.5% from 14% on March 26, as part of an attempt to stimulate growth in Africa’s biggest economy and signal a “new direction”.
Situational Awareness: The major central banks greatly impact currency exchange rates and how money flows through international markets, which can have global repercussions on emerging markets. A recent report from PWC highlights that a major issue is the international coordination to ensure the tools being used are effective within today’s increasingly interdependent markets and avoid the risk of potentially destabilizing consequences.There are some Real-time monitoring and analysis emerging platforms for central banks coming, because without it, global stability will remain vulnerable to continued cycles of debt and currency crises.
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