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Conflicts between politicians and central banks in developing countries harm their economy.”

The independence of central banks worldwide is becoming increasingly important in emerging markets, which does not always benefit investors in local currency and bonds, Bloomberg reports.

One example is the pressure on Thailand’s currency, the baht, due to a standoff between the prime minister and the country’s politicians over the timing of interest rate cuts.

In another country, this time in the EU—Hungary, last week the forint approached its annual low against the euro due to an unresolved conflict between Prime Minister Viktor Orban and the head of the country’s central bank.

The Brazilian real and the Turkish lira have long been criticized by the leaders of the two countries, who insist on a quicker reduction in rates.

For investors, the autonomy of central banks is the most important factor when allocating capital in currencies of developing countries and sovereign debt. It is no secret that many prefer to invest in bonds and currencies of countries actively fighting inflation and cutting rates, unlike those where central banks are forced to follow the lead of political authorities.

Tense relations between central banks and governments exist in every country. But very high interest rates in many countries hinder economic growth, meaning limited access to foreign investment.

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In recent cases, investors usually react by selling the local currency. Generally, the government opposes the central banks’ sharp monetary policy as it prefers to stimulate the economy rather than contain inflation. But low rates and steady inflation lead to capital outflows and lower yields on the countries’ currencies and bonds.

In practice, this can be illustrated by the capital outflow from Thailand, where this year the baht fell by 5% as the country’s prime minister increased pressure on the central bank to cut rates to reduce the recession. The government believes that commercial banks profit from unjustifiably high rates.

The country’s central bank governor responded that rate cuts are not a panacea for structural problems in the economy. Investors’ reaction was expectations of a rate cut within the next six months, while global funds withdrew $478 million from the country’s sovereign bonds since the beginning of January, marking the largest outflow among all developing countries in Asia.

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