Does QE go into EM?
How can quantitative easing best alleviate the financial fallout from Covid-19? Unconventional monetary policies make investors in emerging markets uncomfortable – especially in Latin America. Little wonder that central banks are treading a cautious path.
We have become used to this new era of low, falling and synchronized inflation in developed markets and emerging markets, and so the financial system’s allocations are geared to low inflation and no inflation surprises. If investors all have to shuffle their asset allocation in response to an inflation shock, there is just no way they can do that. It would cause havoc in the market.”
So warns Elina Ribakova, deputy chief economist at the Institute of International Finance (IIF), adding that the chance that the growth in the use of quantitative easing in emerging markets might be the source of such inflation-led havoc is “an unlikely scenario”.
But speaking amid the global recession caused by a pandemic, it seems best not to ignore non-probable risks with large negative impacts.
Ribakova says the impact of the global recession and the lack of fiscal space for many emerging markets to respond to twin demand and supply shocks has led to an increase in discussions among emerging markets central banks about the policy options – and implications – of using QE.