Inflation looms as currencies sag

EMERGING-MARKET currencies face a tough couple of months and, while the rest of the world faces disinflationary pressures, some emerging markets are grappling with rising inflation.

Turkey and South Africa — and to a lesser extent Colombia — are on the watch list for rising inflation from currency weakness.

“This is likely to prompt interest rate hikes,” said William Jackson, senior economist at Capital Economics.

Brazil’s real has slipped more than 30%, the biggest decline for the year to date, followed by Colombia, Malaysia, South Africa and Turkey.

Low commodity prices and the prospect of a rate hike in the world’s largest economy when the US Federal Open Market Committee sits for its last meeting of the year next month is supporting the view of the dollar as a safe-haven investment.

“If the Fed delays the US interest-rate hike, support for the dollar is likely to wane and this could allow emerging-market currencies to recover a bit,” said Christian Lawrence, forex and interest rate exchange strategist at Rabobank.

Emerging-market currencies that are particularly susceptible to US monetary policy tightening typically have a high dependence on foreign capital inflows and have large current deficit accounts. This includes Turkey, Colombia and South Africa, where interest rates are expected to rise as a result.

Brazil has seen inflation rise sharply through a two-year cycle of interest-rate hikes.

“Inflation there has probably peaked and we don’t expect further rate hikes,” Jackson said.

Brazil’s central bank stopped increasing rates in July after raising the rate for the 16th time by 50 basis points to 14.25% since April 2013.

“They are fighting inflation, which they left too late,” said Xhanti Payi, economist at Nascence Research. South Africa’s Reserve Bank was studying Brazil and “making sure they don’t have to do what Brazil is trying to do in catching up”, he added.

Brazil’s credit rating is on junk status and the International Monetary Fund expects GDP to contract by 3% by the end of the year.

Inflationary pressures in South Africa are high due to increases in electricity tariffs and municipal rates and are expected to breach the upper target of 6% next year. Economists argue a rate hike would be dam- aging to the economy.

The agriculture sector, for one, is growing. “If they are hit by a drought, they will need funding to ride this tough time. If it is more expensive to borrow, this may be detrimental to them,” Payi said.

South Africa raised rates in January last year by 50 basis points from four-decade lows to bolster the currency. It has since raised rates four times, including this week’s 25 basis point increase.

The rand, which hit a fresh low of R14.44/$ on Monday, is a threat to inflation due to the impact on the cost of imported goods. In October, inflation inched up 0.1 percentage points to 4.7% from 4.6% in September, Statistics South Africa said on Wednesday.

“Cost-inflation has been shown to be deflationary in South Africa in that it has impacted negatively on consumer spending,” Raymond Parsons, professor at Northwest Business School, said.

Last month Turkey’s central bank left its benchmark repo rate unchanged at 7.5% over uncertainty in global and domestic markets, the inflation outlook and concern over volatility in energy and food prices.

Colombia hiked rates by 0.5 percentage points to 4.97%, the highest since July 2012. Low commodity prices and China’s slowdown have hit large parts of Latin America, the Middle East, Africa and Russia.

Brazil’s GDP is expected to contract by 3% by the end of the year