NALM Americas 2013: Panellists play down expectations of QE wind-down

Central bankers think it unlikely the US Federal Reserve will wind down its quantitative easing programme – but some acknowledge an exit could hit emerging markets hard
Dripping tap

The US Federal Reserve is unlikely to wind down its quantitative easing programme in the near term, given a lack of inflationary pressures and signs the economy remains fragile, according to speakers at the National Asset-Liability Management seminar in São Paulo yesterday.

Recent jitters that the Fed may be close to announcing an exit from its ultra-loose monetary policy has led to a rapid depreciation of emerging market currencies over the past month, with the Brazilian real, for instance, hitting a four-year low against the US dollar earlier this week. US Treasury bond yields have also popped higher in recent weeks.

Despite these concerns, seminar participants were sceptical the Fed would alter its policy any time soon.

"Can I slightly challenge the whole notion that quantitative easing is coming to an end, because as we see, Europe is still in the doldrums, it is still in recession. The US has a huge fiscal deficit that it needs to bring down, and the recovery in the US is recently fragile. Consumer confidence is not that high. Are we really going to see a return to traditional nominal and real interest rates very soon?" said Christian Mulder, senior manager, reserve advisory and management programme, at the World Bank, speaking on a panel focusing on the challenges of capital inflows and outflows.

Other speakers agreed. "It is hard for me to believe that the actions of the Fed – which from some points of view have brought financial stability – will exit quantitative easing in a way that disrupts the world economy in any significant way. So from that point of view, I tend to agree this will not be a dramatic situation," said Milcíades Contreras, head of risk management at the Central Bank of Chile.

However, some panellists sounded a note of caution. The mere rumour that the Fed was considering an exit had caused emerging market currencies to tumble. If the situation deteriorates, emerging markets could experience large capital outflows, possibly prompting them to dip into their foreign currency reserves and sell dollars, said Jorge Estrella, head of monetary policy at the Central Bank of Peru.

"Right now, in one month, our currency has depreciated by 5%, and the Chilean peso also has depreciated, the Brazilian real also, and the Colombian peso has depreciated by 5%, and nothing has happened – this just from a probability of a tapering of quantitative easing. So if things get worse, then what we will see is more depreciation, but also selling of dollars by central banks," he said.

Juan Carlos Alfaro, chief risk officer at the Latin American Reserves Fund, added that central bank portfolios would likely suffer from any rise in interest rates, given the popularity of short-term US and European fixed-income instruments, many of which are paying low coupons. However, he argued that South American countries are less susceptible to external shocks than they were in the 1980s and 1990s.

"Back in 2008, when we had the Lehman crisis, most of the South American countries experienced depreciation of their currencies at that time, and nothing happened with the financial sector. In the past – for example, in the 1990s – a depreciation of the currency of the level that we saw in 2008 would have led to a financial crisis. So that means we have a more stable framework, a healthier financial sector and better fiscal policies. And that reduces the volatility of external shocks to our economies," he said.

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