Policy normalisation puts EMs in ‘perilous’ situation – Mexico’s Calafell

The withdrawal of monetary stimulus in advanced economies has put developing countries in a “perilous” situation, according to a deputy governor of the Bank of Mexico.

The reduction of central bank balance sheets and rising interest rates is “exerting upward pressures on international interest rates at all maturities,” said Javier Guzmán Calafell at an event in Switzerland on June 26.

The tightening of monetary policy in advanced economies “may proceed at a faster pace than currently anticipated by market participants”, he said

For Calafell, this is most obvious in the United States where he believes fiscal stimulus is being applied to an economy that is operating “very close to” full capacity. There is, therefore, “little doubt” developing countries will see external financing conditions tighten further, he said

The International Monetary Fund estimates that capital inflows to emerging markets will be about $40 billion per year over 2018–19 under a “smooth Fed normalisation scenario”, Calafell noted.

If policy tightening were to be accompanied by a rise in risk aversion, the fall in capital inflows could be up to $60 billion.

Advanced economies, Calafell said, therefore have a “fundamental responsibility” to ensure their monetary policies are communicated “properly”, and that they take into account the “international repercussions” they will have.