16 December, 2014: Since the end of the postwar system of fixed exchange rates more than four decades ago, countries repeatedly have faced crises when their currencies tumble. Russiaâ€™s attempt today to support the ruble through higher interest rates is a standard approach deployed with mixed results in recent decades.
â€œThey are going through a full-blown currency crisis,â€ Stephen Roach, former chief economist at Morgan Stanley, said in an interview in Hong Kong today. â€œThey are doing what any central bank would do — they are jacking up interest rates to try to defend the currency. Will it work? Who knows?â€
The Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent, effective today. The move, the largest single increase since 1998, helped the ruble recover, for now, from all-time lows.
One-month ruble forwards rose 9.2 percent to 61.2 versus the dollar at 2:43 p.m. in Hong Kong, after touching a record low of 68.98 earlier, data compiled by Bloomberg show. They slumped 19 percent in the six days through yesterday.
â€œThe lesson of past emerging-market currency collapses is that the exchange rate is a reflection of fundamental deterioration,â€ said Callum Henderson, global head of foreign-exchange research at Standard Chartered Plc inSingapore. Only when capital flows stabilize is the ruble also likely to stabilize, he said.
Below are examples of countries that raised interest rates, and what happened to their currencies in the aftermath:
* Russia in 2009
— With the ruble dropping amid a global recession that sent the price of oil, Russiaâ€™s main export earner, tumbling, the central bank raised rates. The currency strengthened 12 percent against the dollar in the three months following an increase in the one-week repo rate to 12 percent from 9.69 percent in February 2009.
* Russia in 1998
— Beset by political instability and economic dislocation from the end of the command economy, along with diminishing appetite for emerging-market assets after the start of the Asian financial crisis, Russia saw its ruble collapse in 1998.
Putting todayâ€™s move in perspective, Russia tripled its key interest rates on May 27, to 150 percent, in a move endorsed by the U.S. Treasury, which then supported a resumption of International Monetary Fund aid. Subsequent weeks saw the rate go down, then back up, as policy makers struggled to contain the turmoil. A $22.6 billion bailout program unveiled by the IMF in July proved insufficient, and Russia defaulted on $40 billion of domestic debt that month. The ruble plunged 38 percent in August and another 37 percent the next month, ending the year down 71 percent.
* Brazil in 2013-14
— Latin Americaâ€™s largest economy, mired in recession, has endured higher interest rates in a battle by policy makers to contain inflation. The result hasnâ€™t prevented a slide in the real, which is down 12 percent this year, even as the central bank raised the benchmark Selic (BZSTSETA) rate five times, bringing it to 11.75 percent. Six rate rises last year accompanied a 13 percent decline in the exchange rate.
* Brazil in 1998
— Stocks and bonds climbed on Sept. 11, 1998, when the Brazilian central bank raised its benchmark interest rate by 20 percentage points, to 49.75 percent, to stem an outflow of capital. Days later, the IMF and U.S. government pledged their support for Brazilâ€™s efforts. By November, the central bank cut interest rates to aid growth in the run-up to an IMF bailout package.
Even so, pressure on the currency continued. By January 1999, Brazil shifted strategy and let the exchange rate tumble. It slid 27 percent in the first quarter of that year, and the real didnâ€™t post an annual advance against the dollar until 2003.
* Turkey in 2014
— The lira jumped more than 8 percent against the dollar in the four months following the central bankâ€™s increase of the one-week repo rate to 10 percent from 4.5 percent on Jan. 28 — resisting government pressure and reversing years of policy aimed at stoking growth. The stabilization proved temporary, as central bank Governor Erdem Basci reversed course and started cutting the rate in May.
* India in 2013-14
— The rupee strengthened 4.9 percent in September 2013 and gained an additional 1.8 percent in October, the months that the Reserve Bank of India raised the benchmark repo rate to 7.75 percent from 7.25 percent in two moves to ease inflation and support the currency. A further 25 basis-point increase to 8 percent in January proved less helpful, with the rupee losing 1.4 percent against the dollar that month.
* Indonesia in 2013
— The rupiah fell 21 percent in 2013, a year that Indonesia increased the reference rate by 1.75 percentage points, starting in June, to try and stop the currencyâ€™s slide as investor concern rose that the end of the Federal Reserveâ€™s quantitative easing program would spur an outflow of capital from emerging markets.
* Indonesia in 2008
— The central bank raised the main rate to as high as 9.5 percent, from 8 percent at the start of the year, as the global credit crisis hurt demand for riskier assets. The currency slid 15 percent that year.
* Indonesia in 1997-98
— As with other Asian nations hit by crisis at the time, policy makers in an economy where companies had ramped up borrowing from overseas struggled to contain a sliding currency. Repeated interest-rate increases, in one case on May 7, 1998, up to 58 percent, failed. President Suharto resigned later that month. The rupiah ultimately recovered in 1999.
* U.K. 1992
— A pre-euro attempt at European exchange-rate integration ended in failure for Britain, which crashed out of what was called the Exchange Rate Mechanism after interest-rate increases failed to counter bets against the pound made by investors including George Soros.
On Sept. 16, later known as Black Wednesday, the Bank of England boosted its base rate twice, to 15 percent from 10 percent. By the end of the day, the government decided to let the pound float, and canceled the second rate boost, of 3 percentage points, before it took effect. The next day it took the rate back to 10 percent. The currency ended the year down 19 percent, and stabilized the following year.
* Sweden 1992
— The same day as the U.K. turmoil, Sweden took even more drastic action in an attempt to maintain a Europeanreference rate, taking its lending rate to 500 percent. In November, the government surrendered and allowed the krona to fall. The currency depreciated 22 percent against the dollar in 1992, and another 15 percent the next year as policy makers contended with a banking crisis.
* Malaysia 1997-98
— One country that opted against interest-rate increases during the Asian financial crisis was then-Prime Minister Mahathir Mohamadâ€™s Malaysia. Mahathirâ€™s central bank chief quit after failing to execute the higher rates he wanted to defend the ringgit. Authorities instead imposed capital controls. In 1998, the currency gained 2 percent versus the dollar, after a 35 percent loss the previous year.
â€œThey built a wall between themselves and world financial markets,â€ Roach said. â€œThey ultimately ended up coming through the crisis over time in relatively good shape. But the Malaysian experience is the exception not the rule. Malaysia is a small economy. A large country like Russia? No.â€