By PAUL HANNON
The time to have started preparing for the end of the Federal Reserve’s quantitative easing program was at the beginning of the Federal Reserve’s quantitative easing program.
So says Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka. In an interview with the Wall Street Journal Thursday, Mr. Cabraal said he would not expect the Fed to take account of the impact its actions will have on some developing economies when the time comes for it to end its program of bond purchases, and then begin to raise its benchmark interest rate.
“Every country will make their own decisions based on their own requirements,” he said.
The time to have started preparing for the end of the Federal Reserve’s quantitative easing program was at the beginning of the Federal Reserve’s quantitative easing program.
So says Ajith Nivard Cabraal, governor of the Central Bank of Sri Lanka. In an interview with the Wall Street Journal Thursday, Mr. Cabraal said he would not expect the Fed to take account of the impact its actions will have on some developing economies when the time comes for it to end its program of bond purchases, and then begin to raise its benchmark interest rate.
“Every country will make their own decisions based on their own requirements,” he said.
“As to whether it will be the most benign impact for other countries, I don’t think they have the luxury of contemplating. I think that’s something we all have to recognize and appreciate. If we understand that, and we build up our own cushions to deal with any kind of impact that follows such decisions, I think that’s the best way of handling these types of conditions.”
In other words, it’s every central bank for itself, and that is unlikely to change. Mr. Cabraal’s view of the obligations central banks have to each other is at odds with that ofRaghuram Rajan, the governor of the Reserve Bank of India, who Wednesday again called on the Fed and other developed country central banks to plan for a normalization of monetary policy “whose pace and timing is responsive, at least in part, to conditions they (emerging markets) face.”
Hence Mr. Cabraal’s argument that the only way to have prepared for a withdrawal of foreign capital when the Fed begins to tighten is not to have allowed very much of it in to your country in the first place.
“At the time QE commenced, we took a fairly calculated position that it would end at some stage,” he said. “We didn’t encourage huge inflows of capital. We didn’t change our limits on foreign investment. Our investors are there for the longer term.”
As the Fed’s easy money policies helped lower interest rates around the world, many emerging markets fueled breakneck growth in part by issuing record levels of government and corporate debt.
But as the Fed began to wind down some of those policies, economic growth in many developing economies started to slow. In two periods around the middle of last year and early this year, investors began to pull their cash out of emerging market equities and bonds en masse.
In recent days, however, there have been signs that investors are returning to emerging markets.
Sri Lanka limits the share of foreign capital allowed in its treasury markets to 12.5%. Mr.Cabraal said he isn’t advocating that all developing economies follow that example, since some may need more foreign capital than others to generate growth. Instead, he said regulators should focus on whether the level of capital flows is appropriate to an economy’s needs.
“We should always be conscious of what flows are necessary for an economy,” he said. “Low inflows could be one of the factors that would not provide you with sufficient resources. High outflows can cause many shocks. Always be conscious of that.”
In other words, it’s every central bank for itself, and that is unlikely to change. Mr. Cabraal’s view of the obligations central banks have to each other is at odds with that ofRaghuram Rajan, the governor of the Reserve Bank of India, who Wednesday again called on the Fed and other developed country central banks to plan for a normalization of monetary policy “whose pace and timing is responsive, at least in part, to conditions they (emerging markets) face.”
Hence Mr. Cabraal’s argument that the only way to have prepared for a withdrawal of foreign capital when the Fed begins to tighten is not to have allowed very much of it in to your country in the first place.
“At the time QE commenced, we took a fairly calculated position that it would end at some stage,” he said. “We didn’t encourage huge inflows of capital. We didn’t change our limits on foreign investment. Our investors are there for the longer term.”
As the Fed’s easy money policies helped lower interest rates around the world, many emerging markets fueled breakneck growth in part by issuing record levels of government and corporate debt.
But as the Fed began to wind down some of those policies, economic growth in many developing economies started to slow. In two periods around the middle of last year and early this year, investors began to pull their cash out of emerging market equities and bonds en masse.
In recent days, however, there have been signs that investors are returning to emerging markets.
Sri Lanka limits the share of foreign capital allowed in its treasury markets to 12.5%. Mr.Cabraal said he isn’t advocating that all developing economies follow that example, since some may need more foreign capital than others to generate growth. Instead, he said regulators should focus on whether the level of capital flows is appropriate to an economy’s needs.
“We should always be conscious of what flows are necessary for an economy,” he said. “Low inflows could be one of the factors that would not provide you with sufficient resources. High outflows can cause many shocks. Always be conscious of that.”
http://blogs.wsj.com/economics/2014/05/29/sri-lankas-central-banker-emerging-markets-should-be-prepared-for-fed-tightening/?KEYWORDS=sri+lanka
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