Subscribe to enjoy similar stories. The Federal Reserve’s expected rate cut Wednesday will sound the all-clear for overseas central banks that are also concerned about their domestic economic growth. Some of the world’s most consequential central banks, including those in the eurozone, the U.K.
and Canada, already started trimming interest rates in recent months. But there are a number of others, including in India, South Korea and South Africa, that have held back. And the Fed’s move could encourage them to take the plunge.
For many central banks, lowering rates ahead of the Fed risks a weakening of their national currencies. When their rates are lowered relative to U.S. rates, their currency becomes less valuable.
That in turn can raise prices on their imports, creating a fresh wave of inflationary pressures. South Africa falls into that camp. Its central bank might be the next to lower borrowing costs, with policymakers meeting Thursday.
“The fact that the Fed also looks set to start cutting rates will reassure officials that the currency will not suffer renewed falls, at least from their actions alone," said Jason Tuvey, an economist at Capital Economics. A number of the central banks that have yet to lower borrowing costs are in Asia, where inflation rose less sharply than in other parts of the world and central banks tightened policy to a lesser degree. With inflation set to slow, and the risk of unwanted currency depreciation easing as the Fed lowers borrowing costs, they are now set to cut.
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