The Fragile Five now look a lot sturdier

In the shadow of the Federal Reserve meeting, many other central banks are also making decisions on their policy rates. This is also happening in four of the Fragile Five, which are now in a much better position than they were more than a decade ago.

Will it be 0,25 or 0,5 percentage points? Currency traders are counting the hours until the amount of the US policy rate cut is announced on Wednesday evening. But there are many more interest rate knots that will be cut this week. From Brazil to Indonesia and from Turkey to South Africa. This quartet has more in common than you might think at first glance. Together with India, they were mentioned in the same breath in 2013 as members of the Fragile Five. This name was coined by Morgan Stanley analyst James Lord as a designation for vulnerable countries with a high dependence on foreign investment and relatively low foreign exchange reserves.

Turkish central bank charts its own course
The latter is still a weak point in Turkey. The supply of foreign currency fell from over $100 billion ten years ago to less than $40 billion in the summer of 2020, only to recover somewhat. Under pressure from President Recep Tayyip Erdogan, the central bank kept the policy rate far too low for a long time. As a result, inflation remained sky-high and the lira has lost more than 90% of its value in ten years. The Turkish central bank is now being given more room to chart its own course. The policy rate has been increased from 8,5% to 50% in the past year and a half. That rate will probably remain at the same level on Thursday, before falling slightly in the autumn.

Brazilian real could benefit from rising interest rates
In Brazil, the policy rate is expected to rise a notch tomorrow. Shortly after the Brazilian central bank officially became independent in early 2021, the interest rate went up in twelve steps from 2% to almost 14%. Thanks to that decisive action, inflation in Brazil came under control much sooner than in the Western world. Moreover, the real stole the show on currency markets in 2022. A new tailwind may now arise, with the prospect of Brazilian interest rates rising further in the rest of 2024. At the same time, traders will be somewhat concerned about the rising budget deficit, with which the Lulu government is undermining the policy of its own central bank.

Slowing down in South Africa
In South Africa, the policy rate may be cut back a notch tomorrow. Inflation has been moving within the 3% to 6% range envisaged by the South African Reserve Bank for several months. With spending by its own population stagnating and demand for commodities under pressure due to weak global economic growth, South Africa could use the boost of a lower interest rate. Since interest rates in the Western world have also started to slide, the interest rate cut does not have to be at the expense of the rand. Certainly not because the South African currency already took a step back in 2023.

Indonesian rupiah makes a comeback
In Indonesia – where the interest rate knot will be cut tomorrow – much has changed in the past decade. The central bank has managed to bring inflation within the desired range of 1,5% to 3,5% this year. After that, the focus shifted to the rupiah. The central bank would prefer a somewhat stronger currency, as cheap imports of goods and services are a proven method of keeping inflation under control. The rupiah rose sharply against the euro and dollar in August. But in other respects too, the country is doing well in terms of currency, with record reserves of more than $150 billion. Indonesia is a symbol of how the Fragile Five have shed their fragile image.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.