Global recovery is ‘double edged’ for EMEs – Carstens

The global economic recovery is proving more beneficial for advanced economies than for emerging market economies (EMEs), Agustín Carstens said on June 9.

The Bank for International Settlement general manager noted the majority of vaccines had flowed to advanced economies, giving them an easier road to recovery. By contrast, EMEs were in many cases having to deal with surging cases of Covid-19 at a time when “policy space” was limited.

Any strengthening in advanced economies could prove a “double-edged sword” for EMEs, Carstens added. Higher interest rates in advanced economies could trigger a global tightening of financial conditions.

A key factor in the coming months will be developments in inflation. Carstens said he thought it was “too soon” to conclude the world is set for a “sustained period of high inflation”. But he did note “the conditions for a rise in inflation seem to be in place, at least in the US”.

Though inflation could rise significantly higher, “the bigger risk is that even a modest and temporary overshoot of central bank targets could be disruptive if financial markets overreact”, he said.

“This will pose a delicate communication challenge for central banks,” Carstens added. “On the one hand, they will surely want to lean against a pre-emptive market-driven tightening that threatens to hold back the recovery. On the other hand, being seen to be ready to act to prevent demand from getting too far ahead of capacity is key.”