Haunted by memories of past interest rate hikes in the United States, the world’s central banks are setting the stage for a transition to a life with less global stimulus, with many countries already signaling moves toward the exit.

While the Federal Reserve (Fed) has publicly pledged to keep interest rates close to zero – and no hikes are expected until the end of next year at the earliest – official comments on Inflationary pressures could become a chorus in the coming months, making the reduction a more concrete prospect. and likely increasing volatility in global financial markets.

For some developed economies, a return to pre-pandemic conditions means that the withdrawal of the central bank stimulus is already underway.

Meanwhile, more vulnerable central banks are strengthening their financial systems to avoid the kind of capital flight that plagued emerging markets during the 2013 ‘tantrum’, which was sparked by mere hints of a tightening of capital. the Fed after years of super-easy policies deployed during the Global Financial Crisis.

“There is a huge divergence between the economies emerging from the pandemic and those lagging behind. Some emerging central banks could be forced to raise rates to defend their currencies, even at the cost of hurting their still fragile economies, ”said Takahide Kiuchi, former member of the Board of Directors of the Bank of Japan (BoJ).

“This trend could widen if the Fed communicates its reduction strategy in the coming months. This could be part of the risks to the global economy, ”said Kiuchi, currently an economist at the Nomura Research Institute.

The Fed has said it will not start cutting its massive stimulus measures until there is “further substantial progress” in healing the US labor market.

While the job recovery remains uneven, higher than expected inflation raises the possibility that the Fed will have to tighten policy sooner than expected. For now, markets are bracing for the chance that the Fed will start communicating its reduction strategy at its Jackson Hole symposium in August, with possible action later in the year.

Some central banks are already responding. In April, Canada’s central bank became the first of the Group of Seven nations to withdraw its stimulus measures during a pandemic, and reported rates could start rising in 2022.

The Norwegian central bank has already announced its intention to hike rates in the third or fourth quarter of 2021.

New Zealand and South Korea have also hinted that tightening policies are on the agenda as conditions improve.

While decisions in these countries would be primarily driven by national considerations, the eventual withdrawal of Fed support appears to be a global risk for each central bank.

Even Japan’s central bank, which has barely budged from its ultra-accommodative parameters during decades of global cycles, could see an opportunity to cut stimulus.

The central bank of Japan building in Tokyo

“A Fed rate hike could give the BoJ an ideal opportunity to normalize its policy, without worrying too much about triggering a rise in the yen,” said Kiuchi of Nomura.

Developing economies face the greatest risks from the Fed tightening, which has in the past caused market gyrations as rising US interest rates have drawn funds into dollar assets and diverted them from emerging markets , as happened in 1998 and 2013.

Asian markets, the epicenter of the 1998 Asian financial crisis, remain in much better shape with strong foreign exchange reserves to support any currency rout. The governor of India’s central bank said last week that its reserves now exceed US $ 600 billion (RM 2.47 trillion), which he says will help address the challenges of the “global fallout”. “.

But some analysts warn that lessons from the Asian financial crisis may not apply to the current shock induced by the pandemic.

“This crisis is unlike any other in that it is not a financial crisis or an economic crisis,” said former BoJ chief Nobuyasu Atago, who is now an economist at Ichiyoshi Securities in Japan. “The inequality of the current global economy creates various risks for emerging economies. “

Among the countries that view the Fed with suspicion is Indonesia, which relies on foreign capital inflows to finance its current account deficit. “Next year we need to prepare for the possibilities of the US central bank, the Fed, to change its monetary policy, reducing its intervention on liquidity,” Bank of Indonesia Governor Perry said last month. Warjiyo, adding that such changes in US policy would likely impact local bond yields. .

Central banks in the most vulnerable emerging markets, such as Brazil, Ghana and Armenia, have already started their tightening cycle in the face of mounting inflationary pressures. Russia’s central bank is expected to raise rates soon for the third time in a row with inflation well above its target. Reuters

Leika Kihara, Mfuneko Toyana and Karin Strohecker write for Reuters. The opinions expressed here are those of the authors.

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