Global policymakers need to watch out for bubbles, as monetary easing by major central banks pushes liquidity into emerging markets the International Monetary Fund (IMF), has said.
Policymakers need to address some new risks stemming from the easy monetary policies that have been put in place all over the world to fight the consequences of the financial crisis, José Viñals, financial counsellor and director of the International Monetary Fund’s Monetary and Capital Markets Department, said in a news conference.
The easy monetary policies have been “essential” to support the economies but, if they are used over a long time, they could create “excessive risk-taking and asset bubbles,” Viñals said.
“Borrowing in international markets by corporates in emerging markets has been growing at a rapid pace, exposing them to currency risk and leverage,” he said.
“Emerging markets need to keep their guard up against deteriorating bank asset quality and disruptive capital flows,” Viñals added.
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“They should prevent the build-up of excessive leverage and the build-up of asset price bubbles.”
But he did not encourage the use of capital controls, a measure preferred by many policymakers in emerging countries, saying that flexible exchange rates, the level of foreign exchange reserves, adjustments in the monetary and fiscal stances and macroprudential policies could be used instead, to counteract the negative effects of capital flows.
“Let’s also remember that capital flows bring benefits,” Viñals said. “Admittedly sometimes if there is too much capital coming too quickly it may pose problems in terms of overheating.”
The IMF, which before the crisis regarded capital controls as anathema, has changed its position since, and now believes that if they are targeted and temporary; capital controls could be used to ensure financial stability.
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