Bond-buying risks could outweigh rewards for emerging central banks

FILE PHOTO: A worker holds a device to check the temperature of people entering the Chile's central bank building, following the coronavirus disease outbreak in Santiago, Chile April 15, 2020. REUTERS/Ivan Alvarado

But some former policymakers and analysts warn that repeating what is essentially a monetary policy experiment in emerging economies could have unintended consequences. Emerging economies like Turkey or South Africa lack the big domestic savings pools seen in developed countries and rely on foreign investors, attracted by relatively high interest rates, to cover big payment deficits and underpin their currencies.

That tipping point may be determined by a combination of factors, including the size of any QE programme and policymakers’ ability to convince markets of its temporary nature, Siddiqui said. Inflation pressures, the structure of the local bond market and the size of foreign exchange reserves available if needed to sterilise bond purchases or support the currency will also play a role.

But in countries like Turkey or South Africa, where interest rates are still well above those levels, analysts say bond buying programmes will allow governments to finance borrowing at lower cost or in larger size than would otherwise be possible. Few analysts expect more vulnerable emerging markets to enjoy the same benefits, however, and some warn of side-effects.

Source: News Formal (newsformal.com)

This is why QE is a double edged sword. Lagarde's over excitement to continue pumping more money into propping up amongst many, zombie companies and clearly indebting Europe further needs to be curbed. Other options and realities need to be considered.

What a gorgeous door.

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