ince the end of the postwar system of fixed exchange rates more than four decades ago, countries repeatedly have faced crises when their currencies tumble. Russia's attempt this week to support the ruble through higher interest rates is a standard approach deployed with mixed results in recent decades.
"They are going through a full-blown currency crisis," Stephen Roach, former chief economist at Morgan Stanley, said in an interview in Hong Kong. "They 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?"
The Russian central bank said it would raise its key interest rate to 17 per cent from 10.5 per cent, effective from Tuesday.
"The lesson of past emerging-market currency collapses is that the exchange rate is a reflection of fundamental deterioration," said Callum Henderson, global head of foreign- exchange research at Standard Chartered in Singapore. Only when capital flows stabilize is the ruble also likely to stabilise, he said.
Below are examples of countries that raised interest rates, and what happened to their currencies in the aftermath:
- Russia, 2009. With the ruble dropping amid a global recession that sent the price of oil, Russia's main export earner, tumbling, the central bank raised rates. The currency strengthened 12 per cent against the dollar in the three months following an increase in the one-week repo rate to 12 per cent from 9.69 per cent in February 2009.
- Russia, 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 Tuesday's move in perspective, Russia tripled its key interest rates on May 27, to 150 per cent, in a move endorsed by the US Treasury, which then supported a resumption of International Monetary Fund aid. Subsequent weeks saw the rate go down, then back up, as policymakers 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 per cent in August and another 37 per cent the next month, ending the year down 71 per cent.
- Brazil, 2013-14. Latin America's largest economy, mired in recession, has endured higher interest rates in a battle by policy makers to contain inflation. The result hasn't prevented a slide in the real, which is down 12 per cent this year, even as the central bank raised the benchmark Selic rate five times, bringing it to 11.75 per cent. Six rate rises last year accompanied a 13 per cent decline in the exchange rate.
- Brazil, 1998. Stocks and bonds climbed on September 11, 1998, when the Brazilian central bank raised its benchmark interest rate by 20 percentage points, to 49.75 per cent, to stem an outflow of capital. Days later, the IMF and US government pledged their support for Brazil'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 per cent in the first quarter of that year, and the real didn't post an annual advance against the dollar until 2003.
- Turkey, 2014. The lira jumped more than 8 per cent against the dollar in the four months following the central bank's increase of the one-week repo rate to 10 per cent from 4.5 per cent 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, 2013-14. The rupee strengthened 4.9 per cent in September 2013 and gained an additional 1.8 per cent in October, the months that the Reserve Bank of India raised the benchmark repo rate to 7.75 per cent from 7.25 per cent in two moves to ease inflation and support the currency. A further 25 basis-point increase to 8 per cent in January proved less helpful, with the rupee losing 1.4 per cent against the dollar that month.
- Indonesia, 2013. The rupiah fell 21 per cent in 2013, a year that Indonesia increased the reference rate by 1.75 percentage points, starting in June, to try and stop the currency's slide as investor concern rose that the end of the Federal Reserve's quantitative easing program would spur an outflow of capital from emerging markets.
- Indonesia, 2008. The central bank raised the main rate to as high as 9.5 per cent, from 8 per cent at the start of the year, as the global credit crisis hurt demand for riskier assets. The currency slid 15 per cent that year.
- Indonesia, 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 per cent, failed. President Suharto resigned later that month. The rupiah ultimately recovered in 1999.
- Britain, 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 per cent from 10 per cent. By the end of the day, the government decided to let the pound float, and cancelled the second rate boost, of 3 percentage points, before it took effect. The next day it took the rate back to 10 per cent. The currency ended the year down 19 per cent, and stabilised the following year.
- Sweden, 1992. The same day as the British turmoil, Sweden took even more drastic action in an attempt to maintain a European reference rate, taking its lending rate to 500 per cent. In November, the government surrendered and allowed the krona to fall. The currency depreciated 22 per cent against the dollar in 1992, and another 15 per cent 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 Mohamad's Malaysia. Mahathir'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 per cent versus the dollar, after a 35 per cent loss the previous year.
"They built a wall between themselves and world financial markets," Roach said. "They 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."