Why Central Banks In Emerging Markets Are Being Heavily Tested


  • Central Banks face the collective challenge of how to establish new platforms and currencies
  • Jamaica’s central bank increased its policy rate by 50 basis points, bringing it to 6%

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 $30.9 trillion this year. In turn, interest rate hikes by emerging market central banks have outstripped or matched the U.S. 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 were at historical lows 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 has increased its policy rate by 50 basis points last month, bringing it to 6%. The Jamaican central bank has increased rates at eight consecutive meetings since last September, totaling 550 basis points in increases. Additionally, the central bank of Nigeria raised its benchmark interest rate to 14%, 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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