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Bank of Canada Governor Tiff Macklem warned Thursday the global economy faces some longer-term risks from capital and foreign exchange controls deployed in emerging markets, a danger heightened as central banks prepare to remove emergency stimulus.
Some nations are too reliant on these short-term fixes to mask policies that hurt long-run growth prospects, said Macklem, who before becoming Governor was a top official when Canada hosted a G20 meeting. One immediate peril is another rush of capital out of emerging markets repeating what happened early in the pandemic, and Macklem said moves by some major economies to compensate by raising balance-sheet reserves may also hinder the global rebound.
"This demand for reserves is contributing to a shortage of reserve assets, which may be reinforcing the decline in the neutral rate of interest. This in turn raises the risk of liquidity traps and can lead to the buildup of financial vulnerabilities everywhere," Macklem said in the text of a speech to the Council on Foreign Relations. His remarks didn't single out China or any of the 11 nations identified by the U.S. Treasury Department as being on watch for currency manipulation.
"Many EMEs seem to be settling for intermediate exchange rate regimes with more or less regular foreign exchange interventions," Macklem said. "This risks slowing needed structural adjustments."
GLOBAL RISKS
"We need a vision for the international monetary and financial system of the 21st century in which EMEs will form an increasing share of the global economy, while gradually developing their financial systems," Macklem said. "This vision for the long run cannot merely focus on a utopian system where all participants have mature, well-regulated financial systems, fully open capital accounts and exchange rates that are freely floating."
The Governor's remarks didn't touch on Canada's monetary policy ahead of an Oct. 27 decision where markets expect an unchanged 0.25% policy rate and a some QE being tapered to a pace that stabilizes the size of the balance sheet. On the global economy, he also said slow vaccine distribution to developing nations "is the biggest health and economic risk facing the world."
"As the recovery from the pandemic progresses, and major economies begin to remove exceptional monetary stimulus, the system will likely come under more pressure," he said. "Capital outflows could happen again when the largest economies start reducing the extraordinary stimulus put in place to deal with the pandemic."
Source: Bank of Canada
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.