The emerging victims of accommodating policies of the ECB, Fed and BoE
The emerging economies are at risk of flooding due to capital accommodating policies of the U.S. Federal Reserve, European Central Bank and of England, Governor of the Central Bank of South Africa.
In an article published by Financial Times Friday, Gill Marcus believes that “time is that advanced economies do more attention to the effects of excessive capital flows and volatile emerging markets.”
Faced with the financial crisis, the debt, and the economic slowdown, the central banks of most developed countries have sharply reduced interest rates and opened the tap of liquidity to try to revive the economy.
Investors, pockets full of money that yield little in these countries may be tempted to invest in emerging markets where interest rates are more attractive, leading to higher prices of these currencies.
“An excessive appreciation of one currency inevitably leads to a loss of competitiveness for domestic manufacturers,” said Mr. Marcus, who then reviews the range of measures available to central banks of these countries to counter the phenomenon.
Lowering rates is hampered by the risk of inflation, the constitution reserves to intervene is not infinitely expandable and effectiveness of controlling the entry of capital remains to be demonstrated, he said.
While wishing to avoid a currency war, Mr. Marcus is concerned that “too often the debate on how to boost sustainable growth in the world” remains the domain of the largest economies. “It is better to consider the implications of the choices on smaller economies.”