Major economies aren’t the only ones undergoing rate cuts these days as emerging nations are starting to join the easing craze. Just the other day, the central banks of Brazil and South Korea decided to jump in the rate cut bandwagon.
Let’s take a quick look at their recent monetary policy decisions:
Banco Central do Brasil (BCB)
Brazil’s central bank cut its key interest rate by 25 basis points to 7.25%, marking its 10th consecutive rate cut since 2011. BCB officials maintained that this decision is in line with their strategy to promote “stability of monetary conditions for a sufficiently prolonged period.” Now that’s some fancy-schmancy language right there!
Brazilian Finance Minister Guido Mantega clarified that the recent rate cut could help curb the Brazilian real’s rallies, which have been hurting their exports recently. Apparently, the U.S. Fed’s decision to implement QE3 pushed capital flows out of the U.S. dollar and into emerging economies’ currencies, boosting the latter in the process.
Bank of Korea (BoK)
Korea’s central bank also implemented a 0.25% rate cut, bringing its key interest rate to 2.75% and marking its second rate cut for the year. BoK officials even lowered their economic growth forecast from 3% to just 2.4% for 2012.
According to the accompanying statement, Korean central bankers believe that their previous rate cut in July wasn’t enough to boost spending and consumption in the home front. They also pointed out that their export sector isn’t doing so well as the ongoing economic slump, particularly in the U.S. and Europe, dampened demand for Korean products.
Emerging economies are easing. So what?
A closer look at the rhetoric of both BCB’s and BoK’s rate statements reveals that weaknesses in the major economies are mostly to blame for the downturn in Brazil’s and South Korea’s growth. Bear in mind that central banks of other emerging nations such as China, India, South Africa, Colombia, Hungary, and Turkey have also recently loosened monetary policy for similar reasons.
Even the IMF is recognizing that the euro zone’s ongoing debt crisis and the approaching “fiscal cliff “in the U.S. continue to pose serious risks worldwide. Earlier this week, the IMF reduced its estimates for global growth as IMF Director Christine Lagarde specifically noted that emerging economies could be most vulnerable.
What does this imply about the global economy?
With developed nations dealing with their own lists of economic and fiscal problems, emerging nations are usually the ones left driving global growth. They’re called emerging nations for a reason; they’re supposed to show fast-paced growth and have aggressive economic policies.
The fact that the likes of China, Brazil, and South Korea are starting to buckle implies that the global economy is in very bad shape, much like Dr. Pipslow who hasn’t hit the gym since his teenage years! Major economies definitely have to flex more muscle and carry their own weight if they want to keep the global economy afloat.