The insurgents behind the currency war are in retreat, sent on the run by a surge of inflation.
Some of the same emerging markets that fought the gains in their currencies only a few months ago through intervention and capital controls are now allowing higher interest rates.
Russia’s central bank on Tuesday widened the range in which it allows the rouble to float. “We think this measure … will ensure more effective transmission of interest rate policy and … better control price stability,” Alexi Ulyukayev told a briefing in Moscow, according to Reuters.
This shift suggests emerging markets are listening to the advice they have been getting from the International Monetary Fund, which has expressed worry in recent months that inflation pressure and asset-price bubbles in developing countries. The IMF tacitly endorsed capital controls, but warned rising prices would ultimately have to be kept in check by higher interest rates and stronger currencies.
Might it also be a sign that the Group of 20, whose only power comes from peer pressure and persuasion, is working? The issue of capital controls was a hot topic at last month’s meeting in Paris.
Pravin Gordhan, finance minister of G20 member South Africa went from worrying about an overvalued currency in October to noting last week that a rapid weakening of the rand would stoke inflation. Brazil, which declared the “currency war” last autumn, also has toned down its rhetoric of late. The country’s central bank raised interest rates in January and may do so again when policy makers meet on Wednesday.
No doubt the persuasive powers of U.S. Treasury Secretary Timothy Geithner, French Finance Minister Christine Lagarde and some of the others pushing for flexible exchange rates are considerable.
But oil at $100 a barrel and sky-high food prices are probably the bigger reason emerging markets suddenly are less inclined to keep their exchange rates low.
Not all emerging markets have been as transparent as Russia in embracing stronger currencies, but many appear ready to follow. Russia’s consumer price index increased to 9.6 per cent in January from a year earlier; Mr. Ulyukayev said today that the central bank wants to keep inflation below 10 per cent.
“Russia is one of the few (emerging market) countries to openly embrace a stronger currency, and is doing so to limit to help limit inflation,” Win Thin, global head of emerging market strategy at Brown Brothers Harriman, said in a research note Tuesday.
