Daily Management Review

Central banks in developing countries are lowering rates to fight looming crisis


Developing countries, where the growth in the number of cases began later than in Europe and the USA, and is currently at its peak, are forced to take new measures to combat the crisis. In addition to increasing government spending, their central banks, which were previously more restrained in their policies because of the risk of higher inflation, have also resorted to large-scale easing. Last week, the Brazilian regulator lowered the rate to a record low 2.25%, and the Central Bank of India took similar measures in late May.

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Last Thursday, the Central Bank of Brazil lowered the key rate (Selic) immediately by 75 basis points, to 2.25%, and indicated the possibility of further reduction. At the end of last year, the rate was 6.5%, and in 2015–2016 it reached 14.25%. In a statement, the regulator pointed out that, despite support measures in large countries, as well as reducing volatility in financial markets, the situation for emerging economies remains difficult. 

The bank notes that the growth prospects in the second half of the year remain extremely uncertain, while according to the results of the first quarter, the decrease was already 1.5%. According to the estimates of analysts polled by Reuters, it may reach 12.7% in annual terms. Inflation expectations were also further reduced - now the bank expects prices to rise by 1.6% this year and by 3% in the next year. In May, the indicator was 1.88% , the lowest inflation rate since 1999 (3.7% in the last year). The government has also announced fiscal support of $ 62 billion, which could lead to an increase in the budget deficit to 9.4% of GDP.

The Indian economy also gives a slightly less pessimistic forecast: there is also a sharp acceleration in the growth in the number of cases (over 400 thousand cases, a daily increase of over 13 thousand people). The decline may reach 7.3–3.7%, and for 2021 the growth of 7.9–8.1% is expected. The country's central bank has also already lowered its key rate to 4%, the lowest level since its inception in 2000 (since the crisis began, the decline was 115 basis points). 

Developed countries prefer to finance sharply increased fiscal deficits due to support from quantitative easing (it usually involves the redemption of government bonds in the secondary market on the balance of the central bank). The situation, however, is more complicated in developing countries, according to The Institute of International Finance in Washington. The greatest need for such monetary support is observed in South Africa and Brazil, the budget deficit has grown the strongest again in Brazil and also in Hungary, additional pressure will be exerted by a drop in tax collections, which during the crisis occurs with a lag, for example, in 2008-2009, the peak accounted for April 2009.

source: iif.com