21 Oct 2019
Large global capital inflows and extended ultra-low interest policies of advanced nations have made it tougher for emerging economies to safeguard their financial system.
This is the warning from the governor of the Bank of Thailand, Veerathai Santiprabhob.
Due to the increase of capital flows fuelled by global investors seeking “speculative returns” over the past 10 years, emerging economies have become more susceptible to exchange-rate volatility negatively impacting their businesses, the governor stated.
Veerathai said at a seminar on policy challenges for emerging market central banks: “At times, exchange rates could serve as an amplifier of shocks in capital flows instead of being a stabiliser of shock in capital flows.
“The movement of the exchange rate is an important channel for small, open economies and have a real impact on profit margins, competitiveness ... and survival of exporting firms.”
In addition, Reuters reports, overspill from advanced economies’ ultra-loose monetary policies risks undermining financial stability in emerging economies.
The Bank of Thailand governor went on to say that central banks in emerging markets must follow their counterparts in advanced nations in postponing the normalisation of ultra-loose monetary policies to avoid appreciation of their currencies.
Veerathai added: “Because of this, emerging markets’ monetary policies could be distracted from the core mandate of their domestic policy objectives.
“A delay in the normalisation (of monetary policy) from the low-for-long rate environment could exacerbate financial system stability.”
The fact that household debt is already at record high levels and with subdued inflation in their economies, central banks in emerging markets can not just view inflation, they must also look at financial stability when seeking monetary policy, the governor stated.
“Financial stability has to be given a more prominent role in monetary policy decisions,” he said.