GEMs Paper #17 A Guide to EM Central Banks

BofA Merrill Lynch Global Research - Jueves, 22 de Mayo

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Landing is the hardest part In the next two to three years, monetary authorities in the emerging world may face the challenge of adjusting their policies to normalizing conditions in the major economies. EM central banks already got a taste of those challenges in 2013, when discussions about tapering first emerged. As the Fed moves from tapering to actually hiking interest rates next year, the policy tradeoffs faced by EM central bankers will likely become more challenging. 

Don't be scared, be prepared  

As policy rates rise in the major economies, EM central bankers may deal with a potential slowdown in portfolio capital inflows (or outright outflows), possible pressures on their currencies, and even with potential upward pressures on inflation. How will they likely react to the changing circumstances? This Guide delivers a unique roadmap, by providing a systematic analysis of the objectives, policy instruments, decision-making process, and known board-member biases at 28 emerging market central banks. 

So far, so good 

If the current tapering process is any indication, emerging economies should be able to manage the normalization in global monetary policy quite well. Of the 22 that conduct regular monetary policy committee meetings, at which they set policy rates, only eight have hiked rates since the taper tantrum began. Nine central banks have actually eased policy rates since the taper tantrum. 

Why so easy? 

Declining FX pass-through to inflation has helped many central banks to maintain or ease policy. Declining FX mismatches across EM have resulted in lower vulnerability and smaller FX selloffs. In the past 20 years, the stock of sovereign debt denominated in domestic EM currency has grown to represent 89% of the stock of sovereign debt outstanding, compared with 61% in 1993. 

Pay attention to what counts 

Understanding the variety of instruments and options at central banks' disposal will be crucial to gauging the potential policy responses to the changing global environment. But our Guide also provides a systematic account of the legal, political, and institutional constraints that central bankers face in EM, and the way they operate in practice rather than in theory. In this 2014 edition, we also expand our coverage to Nigeria and the Czech Republic, and provide updates on changes to monetary policy committees or shifts in policy tools in Russia, Korea, India, Turkey, Ukraine, and Venezuela.  

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