Capital controls: IDB calls for action against rising currencies
Monetary policy seen as insufficient; Macro-prudential policies also required
A report by the Inter-American Development Bank suggests that fast-growing Latin American economies will need to implement macro-prudential policies to counter exchange rate appreciation. The use of these tools – which include capital controls, liquidity regulations and capital requirements and provisions – to combat the currency appreciation caused by high levels of capital inflows is contentious and was the topic of much debate at the IDB’s annual meeting in Calgary last month.
"External funding at low cost under the present circumstances, and despite our tight prudential rules, creates incentives to increase risk taking and can end up in asset price distortions vis-à-vis the exchange rate"
Alejandro Izquierdo, co-author of the IDB report, One region, two speeds – challenges of the new global economic order for Latin America and the Caribbean, told Euromoney that avoiding "excessive exchange rate appreciation... will require very good macro-economic management to make sure that you don’t have overheating". Izquierdo says that monetary policy alone will be ineffective in combating currency appreciation in countries that the report designates as the faster-growing "Brazil cluster" because raising interest rates would increase capital inflows from abroad, thereby putting pressure on the exchange rate.