Central bankers in countries including Ghana and Nigeria have come up with what at first glance appears a clever fix. But there is a catch
Yet even as the inflation monster remains untamed, emerging-market central banks are engaging in experiments that put this progress at risk. Some of the new measures are in response to changes beyond their control, such as Vladimir Putin’s invasion of Ukraine. Others are attempts to overcome painfully familiar problems, like currency depreciation. All threaten to undermine recent advances, which are ultimately based on central-bank credibility.
The most expensive recent experiments are those which seek to prevent currencies falling in value. Central bankers once used to make their currencies more attractive by ratcheting up interest rates and selling off foreign-exchange reserves. They are now less keen on raising rates to protect exchange rates, preferring to do so only to tackle inflation, and some lack reserves after sales at the start of the covid-19 pandemic.
Russia’s central bank is another enthusiastic experimenter. It had stocked up on gold and currencies from China and other friendly countries, which helped when sanctions cut off $300bn in reserves held by banks in America and Europe. Early in the war, officials also steadied the ship by doubling interest rates, helping to calm the rouble. Since then, however, things have got harder.
Other experiments involve playing around with central banks’ balance-sheets. The treasuries of advanced economies rarely run budgets on a hand-to-mouth basis, since they are equipped with plenty of capital and have the option of issuing more debt. By contrast, emerging-market governments, such as those in India and the United Arab Emirates, increasingly plug gaps by dipping into a “ways-and-means” account at the central bank. This is a risky move.
There are already plenty of threats to emerging-market central banks. Chief among them is the fact it will be harder to get policy right as inflation falls than it was while it rose. As emerging-market central bankers quickly spotted, global shocks sent prices soaring everywhere. But economies cool in very different ways, based on the reactions of consumers, industries and politicians.
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