Japan on Thursday entered the currency market for the first time in decades to suppress the yen and there is speculation that the British authorities may be similarly forced to intervene. There is even talk of an emergency hike in UK interest rates to stem the sterling collapse. Traders rushed to price in price hikes of up to 150 basis points before the next monetary policy meeting in November. With its enormous state power, China is also trying to limit the decline of the yuan.
Being mentioned in the same breath as emerging markets has at times been a convenient analogy. It meant outsized growth prospects and a feasible approach to economy and business. But it can also mean that politics tends to falter suddenly – shorthand for loose governance and a lukewarm commitment to containing inflation.
Former US Treasury Secretary Larry Summers lamented that Britain is taking the worst approach of a momentous nation in a long time. “Britain is acting a bit like a rising market turning into a falling market,” Summers told Bloomberg Television’s Wall Street Week. The situation is so dire that some comparisons have even been drawn to Turkey, an economy whose policies appear designed to exacerbate inflation – which currently stands at around 80% – rather than contain it. Ankara has become such a poster child for bad behavior that it often goes unmentioned in polite company.
By one metric, the UK isn’t a million miles away. The pound is down 21% against the greenback this year, the most of any major currency. The Turkish lira fell 28%. Alarmingly, the pound’s fall is now larger than the currency of Japan, a country that has steadfastly refused to raise interest rates and has intervened to buy the yen after it fell to its lowest level since the late 1990s Asian financial crisis was.
Being in this company is unfair. The BOE has hiked rates seven times since it launched the anti-inflation cycle late last year and beat the Federal Reserve on the starting line, and well before the European Central Bank got going. A day before Liz Truss’ new government announced its “growth plan,” the BOE enacted its second consecutive half-point move; Three of the nine members of the bank’s monetary policy committee called for a three-quarters-point hike, as the Fed and ECB have done.
Given the thrust of the government’s approach, there is likely to be some regret at the bank. Global monetary authorities are raising the stakes so quickly that 50 basis points – a move that would have been considered decisive just a few months ago – now seems underwhelming. That’s unfortunate because at some point the central banks’ sprint will have to slow down and officials will have to look around and assess the impact of restrictive stances on growth.
As unpleasant as the current British spectacle is, Britain is not yet in Turkey mode. A large part of what is hurting Turkey’s economy and financial markets is the corrosive nature of inflation, which is not only untamed but almost welcome. A number of central bankers trying to stifle price hikes were deemed insufficiently committed to cutting interest rates and were told by President Recep Tayyip Erdogan’s team that their services were no longer needed.
Until Truss’s government tries to fire the BOE chief or urge him to resign, Britain is nowhere near replicating the underlying substance of Turkey’s mess. As troubled as 2022 has been for central bankers, Bailey’s biggest test may yet lie ahead. He’s the adult in the room.
A classic response from emerging markets today could be to impose certain types of capital controls on capital or, in the extreme, to fix the currency. That’s nowhere near close. Malaysia got away with both in 1998, but not without reputational issues, including the firing and imprisonment of the finance minister and a central bank purge. And Malaysia did not start this adventure as an advanced economy, with all the expectations and conventions that come with it.
Whenever the subject of a strong dollar comes up, the era of Robert Rubin, who served as Treasury Secretary from 1995 to 1999, is thrown back. Summers was his deputy at the Treasury Department, succeeding Rubin. Rubin insisted that a strong dollar was in the country’s best interest. But there were occasional and very significant exceptions. Rubin sold the dollar in June 1998 to support Japan’s efforts to stabilize its currency. In 2000, Summers dumped dollars to buy euros as part of a Group of Seven bailout of the struggling new currency.
In his memoir, In an Uncertain World: Tough Choices From Wall Street to Washington, with Jacob Weisberg, Rubin said there were rare instances when currency intervention made sense. Reflecting on the yen action, Rubin wrote that the “psychology” of the FX market had changed. “We have very rarely intervened, and each of our interventions has been successful,” he said.
Right now, the psychology of the market is to inflict pain on any non-dollar nation perceived to be lax on inflation or laggard on interest rates. Panic from the BOE could make things worse. Markets may need to deteriorate further before an official response comes. If Bailey becomes the man of the hour, my advice would be to speak carefully and forcefully. Don’t give multiple interviews. Do not hold a press conference where talks can go awry and be misinterpreted. Keep the message simple. Rubin was a master of news discipline. It would be wise to follow him.
More from the Bloomberg Opinion:
• The Bank of England takes a soft, soft approach: Marcus Ashworth
• The strong dollar pays some dividends: Robert Burgess
• Japan’s FX intervention underscores Kuroda isolation: Daniel Moss
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Editor-in-Chief for Economics at Bloomberg News.
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