On May 4, the Federal Reserve made its long-awaited announcement that it was raising interest rates by 0.5%, supposedly to curb inflation, and that it expected to repeat the hike various times this year. One week later, we are seeing the predictable results: 1) inflation is exploding worldwide, hitting 30-year highs; 2) country after country is raising its interest rates in tandem with the Fed, to try to stop massive capital flight into the “strengthening” dollar; and 3) nearly all currencies are devaluing against the dollar, as the speculative capital flight accelerates. As the Financial Times put it on May 9, “reverse currency wars” are underway.
Inflation: The Biden administration announced that the U.S. yearly inflation rate for April was “only 8.3%,” down from 8.5% in March, but still close to a 40-year high. And the only reason for the small drop in April is energy rates, which in May have resumed their sharply higher trajectory. The April rate for the EU is 9.3%; in Argentina it is running above 50%; Turkey is at 70%; Brazil’s inflation hit 11.3%, a 27-year high; and the IMF expects inflation to average 8.7% in all emerging markets this year — some 2.8 percentage points higher than projected in January.
China, on the other hand, yesterday announced that their inflation was running at 2.1% in April — worrisome for them, but markedly lower than the trans-Atlantic world.
Interest rates: After the Fed’s May 4 hike of 0.5%, Sweden’s Sveriges Riksbank central bank raised its rate from zero to 0.25%, citing the highest inflation level since the 1990s. The ECB, the Bank of England, the Bank of Japan and the Bank of Switzerland are all expected to raise their rates shortly. India raised its interest rate preemptively, before the Fed did, from 4.0% to 4.4%. Brazil raised its Selic rate on May 4 from 11.75% to 12.75%. Argentina’s rate stands at 47%; Chile at 8.25%; Mexico at 6.5%, but is expected to raise it any day.
Devaluations and capital flight: Reuters reported today that “the recent dollar rally is leaving a trail of destruction in its wake,” with an emerging markets currency index dropping 3.5% against the dollar this year to an 18-month low. Yesterday’s dollar rate was at its highest level in 20 years against “a basket of rival currencies.” The euro, for example, has fallen to $1.05, and there is talk that it could shortly hit parity. As for India, the Economic Times reported yesterday that the rupee is “plunging” to “record lows,” hitting Rs.77.50 to the dollar. And foreign institutional investors have already been selling off Indian domestic debt at a “ferocious pace” in 2022.
The Russian ruble, however, protected by strong exchange and capital controls, is stable (and even strengthening) at 66 to the dollar.
The “reverse carry trade,” or capital flight, out of developing sector economies is already very substantial, and dangerous. According to the Institute of International Finance (IIF), emerging market portfolios posted a net outflow of $4.0 billion last month, compared to outflows of $7.8 billion in March and inflows of $39.8 billion in April 2021, Reuters reported.
