This week 11 central banks took policy decisions with two banks raising rates, three banks cutting rates and the remaining six keeping rates on hold as the dominant force in global markets shifted from Japan's massive quantitative easing to the prospect of a winding down of extraordinary monetary easing in the United States.
While the Bank of Japan's (BOJ) new easing from April accelerated years of capital inflow to emerging markets and put upward pressure on their currencies, the eventual tapering of U.S. asset purchases is having the exact opposite effect, triggering fears that a sudden outflow of funds may lead to a fall in currencies, assets and financial instability.
One sign of the apparent shift in the direction of global capital is illustrated by the success the central banks in Thailand and Israel had in reversing last year's appreciation of their currencies with rate cuts.
Colombia's central bank, which continued to hold rates steady this week in after slashing them last year, also extended its intervention in foreign exchange markets for another four months to ensure the peso doesn't appreciate.
However, the Central Bank of Colombia pointed out that its peso had been falling against the U.S. dollar, either because its exporters are getting lower prices for their goods or because investors are beginning to speculate on the U.S. Federal Reserve reducing its asset purchase program.
The trigger to this shift in global sentiment was Federal Reserve Chairman Ben Bernanke's statement to a Congressional committee on May 22 that the Fed could "in the next few meetings take a step down in our pace of purchases."
Bernanke's words lead to a swift fall in U.S. Treasuries and a drop in global stock markets as major investors seem to start the long-awaited adjustment in their portfolios away from emerging markets.
Other signs of the sudden shift in sentiment and capital flows was the continued fall in Brazil's real, despite a second consecutive rate hike this week to combat inflation, along with further falls in the currencies of Turkey and South Africa.
Jose Uribe, governor of the Central Bank of Colombia, already commented on the possible effects of changes to the U.S. policy stance, pointing to the financial crises and trauma in Latin America in the 1980s and 1990s from the reversal of capital flows following tighter policy by the Federal Reserve.
Unlike then, however, Uribe said Latin American economies are now on a much sounder footing and better able to absorb the shock, shown by their resilience to the Lehman shock, while growth in advanced economies remains sluggish and constrained by debt so the withdrawal of global liquidity is likely to be more gradual.
"In this context the adjustment of U.S. monetary policy will not lead to such a dire crash for our economies as we have experienced in the past," Uribe said on May 15.
Along with this week's rate cuts by Thailand and Israel, Hungary cut its rate for the 10th time in a row. It was Israel's second rate cut this month, prompting an adviser to Bank of Israel Governor Stanley Fischer to say that the rate cuts and plans to intervene in foreign markets had been successful in reversing the shekel's rise.
In addition to Brazil, Zambia also raised its rate this week due to inflationary pressures while central banks in Canada, Tunisia, Fiji, Moldova, Angola and Colombia maintained rates.
It was the first time this year that policy rates were raised twice in one week, raising the tantalizing prospect that a four-year trend of declining global policy rates may be coming to an end.
It is still early days, but if capital really starts flowing out of emerging markets while their economies continue to grow, it will tend to fuel inflation and lead to higher interest rates.
Through the first 22 weeks of this year, policy rates have been raised 11 times, or 5.2 percent of 211 policy decisions taken by the 90 central banks followed by Central Bank News. This is up from 4.5 percent after week 21.
Since the Bank of Japan's launch of its new phase of monetary easing on April 4, policy rates have been cut 18 times by a total of 1,020 basis points in response to weak growth and low inflation. Seven of those rate cuts - for a total reduction of 225 basis points - were partially in response to the BOJ's easing which has lead to a plunge in the yen and an accompanying rise in other currencies, shifting the global competitive landscape.
So far this year, rate cuts account for 24 percent of all policy decisions, unchanged from last week but down from 25 percent after week 20.
LAST WEEK'S (WEEK 22) MONETARY POLICY DECISIONS:
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NEXT WEEK (week 23) features seven scheduled central bank policy meetings, including Australia, Poland, Uganda, Serbia, the European Central Bank, the United Kingdom and Mexico.
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