IMF advises emerging markets to use policy buffers in coping with QE3 exit
2013-06-21 12:47:14
The International Monetary Fund (IMF) on Thursday said that emerging markets should use their economic policy buffers wisely to deal with market turbulence after US Federal Reserve announced its plan to gradually exit the large-scale bond-buying program.
US Fed Chairman Ben Bernanke said on Wednesday that the central bank would start scaling back its massive bond-buying program, the so-called QE3, later this year if the economy improves as expected and may end it by mid-2014, causing global stock markets to tumble.
Policy responses in each emerging market should be "country specific," as the Washington-based global lender is watching the market reaction closely, said IMF chief spokesman Gerry Rice at a regular briefing.
As a general rule, countries that adopt sound macro-economic policies, deeper domestic financial markets, as well as strong macro-prudential and micro-prudential policies will be in a better position to withstand any potential market turbulence, he told reporters.
"Generally, the appropriate policy would be to allow markets to adjust to the rise in US rates and premiums. Depending on the extent of outflows and liquidity pressures on market segments, some countries may need to focus on ensuring orderly market functioning, using their policy buffers wisely," Rice said.
The recent financial crisis provides a reminder for emerging markets to rebuild policy space and reduce vulnerability as financial conditions normalize. It will help emerging markets effectively cope with future market fluctuations, he added.
In a concluding statement after an annual check-up of US economic and financial situations released last week, the IMF said that the Fed's highly accommodative monetary policy stance has provided important support to the US and global economic recovery, but "a long period of exceptionally low interest rates may entail potential unintended consequences for domestic financial stability and has complicated the macro-policy environment in some emerging markets."
"Effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates and excessive interest rate volatility as the exit nears, which could have adverse global implications, including a reversal of capital flows to emerging markets and higher international financial market volatility," said the statement.