ECONOMYNEXT – The Hong Kong Monetary Authority, an Orthodox Currency Board and the United Arab Emirates similar to a currency board, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman as well as Vietnam have raised their rates in tandem as the US Federal Reserve raised rates as Sri Lanka eyes a new law with more flexible policy.
The US Fed raised its target rate to 3.0 – 3.25% and interest on reserve balances (formerly called excess reserves) to 3.15%.
The Hong Kong Monetary Authoritya quasi-Orthodox currency board, raised its base rate to 3.50% or 50 basis points above the Fed’s lower target rate or five-day moving average of the overnight rate and of the Hong Kong one-month interbank rate, whichever is higher.
The United Arab Emirates, which has a currency board type arrangement with several other Gulf Cooperation Council country, raised its overnight deposit rate from 2.4 to 3.15 percent and the lending rate to 50 basis points above the IORB rate.
The Central Bank of Saudi Arabia raised the liquidity injection rate by 75 basis points to 3.75% and the excess liquidity deposit rate by 75 basis points to 3.25%.
Kuwait said it was raising its rate by 25 basis points to 3%. The Central Bank of Qatar raised its deposit rate by 75 basis points to 3.75% as.
Bahrain raised its overnight deposit rate from 3.00 to 3.75%, the four-week deposit rate from 4 to 4.75% and lending rates from 4.50 to 5.25%. Bahrain raised the key interest rate on a one-week deposit facility from 3.25 to 4%.
Oman also raised its key rate at 3.75%.
Vietnam, which has maintained its peg around 22,000 to 23,000 dong against the US dollar for about 12 years after its last currency crisis in 2011 following the “stimulus” debacle when the Greenspan-Bernanke bubble increased rates by 100 basis points.
The rise brought the overnight liquidity auction rate, which fluctuates depending on liquidity conditions, to a ceiling of 6.0%. Another discount and rediscount rate was increased to 5.0 and 3.5%. The Vietnamese dong has lost around 200-300 dong over the past few weeks.
The State Bank of Vietnam has promised US Treasury Secretary Janet Yellen, former Fed chief, that it will not depreciate its currency and that it will remain stable for domestic stability, after Treasury Trump falsely branded Vietnam a currency manipulator based on mercantilist beliefs.
Rising domestic rates prevent the domestic credit cycle from going beyond the Fed cycle and triggering a credit and import bubble and depletion of import reserves, panic and ultimately crisis of the balance of payments.
Poor countries, with reserve-raising pegs that believe they can prolong credit cycles with flexible or independent monetary policy (now called flexible inflation targeting) are faced with collapsing currencies, rising rates of sharply higher interest, to social unrest and in extreme cases like the central bank of Sri Lanka and in Africa, malnutrition as food prices soar.
Vietnam has so far rejected pressure from the International Monetary Fund to adopt an independent monetary policy, but it also has other methods of controlling interest rates on broader credit that may leave the currency vulnerable.
RelatedVietnam promises US it won’t devalue, but dreaded Sri Lankan-style ‘currency modernization’ looms
Former Prime Minister of Singapore, Lee Kwan Yew, in August 1966, two days before a currency board law was announced, described the phenomenon as follows in a speech to workers.
“Okay, stop it; Pause; withdraw money. Bank rates go up; money cannot be borrowed easily; stores cannot borrow money; private owners cannot borrow money to build houses, buy cars; hire-purchase is more difficult; expenditure contracts; demand drops; imports are falling; unemployment is rising,” Prime Minister Lee explained.
“Now we are going to use a currency system, which means that as soon as we earn less, we spend less.
“It’s a tough, vigorous diet. And I say we do or we die because this is a society with an open, exposed market,” Prime Minister Lee said.
Economists at the time warned against setting up a currency board citing various scare stories about deflation and urged Singapore to set up a central bank.
The Sri Lankan public gave economists and bureaucrats the tools to print money to suppress rates and burst reserves for imports and depreciate the currency to reduce real wages in 1950 and not has not yet been able to recover it, despite malnutrition.
Sri Lanka’s interest rates are now at 30% and inflation close to 70% after the latest mishap with post-Keynesian flexible monetary policy with a peg.
Most western central banks that printed stimulus money with floating regimes are now engaging in “Okay, stop; Pause; withdraw the money,” as Prime Minister Lee explained. (Colombo/September 26, 2022)