Aggressive Interventions from Philippines and Emerging Market Central Banks

Actions speak louder than words.

Central banks of emerging markets including the Philippines have aggressively been intervening in the marketplace signaling an ambiance of heightened instability.

From the Bloomberg,

Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.

Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies.

After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.

“Policy makers will become more aggressive,” said Bhanu Baweja, a London-based strategist at UBS. “The currency strengthening is in contrast with the state of the economy. That argues for much weaker foreign-exchange rates.”

Again the elixir of cheap currencies reveals of the deep seated mercantilist dogma espoused by central bankers. ‘Cheap currencies’ to promote exports have signified as the standard slogan in justifying ‘inflationism’. The real concealed reason has been to promote the interests of the elites.

The Philippine’s Bangko Sentral ng Pilipinas has been no exception.

From the same article,

In the Philippines, the central bank tightened rules on capital inflows last month by prohibiting foreigners from parking funds in so-called special deposit accounts. Policy makers also cut the benchmark interest rate by a quarter- percentage point on July 26 to a record 3.75 percent, a move that Deputy Governor Diwa Guinigundo said will help “temper” peso gains. The currency’s 4.6 percent advance versus the dollar this year is the best performance in Asia. The peso fell 0.2 percent yesterday.

There are many ways to skin a cat as the old saw goes. This means that should foreigners decide to put in money here, they can do so through many law circumventing options such as padding of local export receipts or transfer pricing and etc…, so the BSP’s action can be seen as superficial and symbolical.

None the less, given that the risks of a global economic slowdown seems to be intensifying, home bias has been the natural response resorted to by foreign investors. The possible exception would be from the capital flight dynamic in response to the Euro debt crisis.

All these inflationism resorted to by global central bankers will distort the real economy through the pricing system. This only means that boom bust cycles will be global and will intensify.