Emerging Economies Hike Rates to Defend
Currencies
The article
that I found was published to the ABC news website and was written on January
29th. Countries are becoming increasingly open to the idea of
raising interest rates as a way to protect their domestic currencies. Recently,
the central bank in India increased rates by a quarter of a percent up to eight
percent. This doesn’t seem like much but it can have a substantial effect on
the local economy as well as international investors. According to the author,
this move was justified because it will keep a cap on inflation pressures. A
lower value for currency is susceptible to stroke inflation because it
increases the relative price of imports. Raising interest rates can have a
positive effect by strengthening the value of local currency because investors
are looking for higher returns. Turkey and South Africa quickly followed India’s
example and jacked up their rates to ensure the well-being of the lira and
rand. Unfortunately, according to Neil Mackinnon, "The history of using interest rates to defend a
currency usually ends in tears." We will have to see whether or not more
countries follow India’s method.
http://abcnews.go.com/International/wireStory/emerging-economies-hike-rates-defend-currencies-22280693
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ReplyDeleteI think that with the dramatic fall of the Euro many countries have become concerned about the value of their own currency. The value of a countries currency has a strong correlation with the stability of their economy. I think its beneficial for these countries to do what they can in order to strengthen their currency. However they must becareful to not raise interest rates to much because that can have devastating affects as well.
ReplyDeleteIn the long-term I'm not sure that higher interest rates will help the economy as a whole. If investors are looking for high return investments and can't find them, their money will just sit in their bank accounts. Private and public investment will decrease and the country's debt could increase as a result.
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