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More interest rate hikes in store for troubled emerging markets

February 3, 2014

MICHAEL BIRD

REPEATED foreign exchange shocks may push emerging markets to keep raising interest rates, despite weak prospects for growth, economists have claimed. Despite several central banks in developing economies raising interest rates and intervening in markets last week, researchers from Oxford Economics suggest that the round of tightening may continue. The economists compare the situation in emerging markets to former Federal Reserve chairman Paul Volcker's chain of interest rate increases in the 1980s. "A view is developing that the rapid growth in emerging markets in recent years was excessively based on cheap liquidity and heavy capital inflows," said Clare Howarth , the author of the analysis. "Against this background, a series of sharp interest rate rises will have a mixed impact. It may help stabilise currencies in the very near term, but is unlikely to assist economic growth and may even strengthen pessimistic views about the medium-term prospects of the emerging economies." Last week, central banks hiked interest rates in India , South Africa , Argentina and Turkey , while the Russian and Romanian central banks intervened in foreign exchange markets to stem the devaluation of heir currencies.


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Source: City A.M. (UK)


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