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In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.
Speculation that the US is among some who are terminating stimulus packages has rocked money markets in emerging economies as currencies continue to lose ground to the greenback.
In recent weeks, BRICS countries have watched with concern as capital began to flow out of their economies, reversing a trend that helped sustain them as the world’s dynamo. Brazil and India, for example, have taken immediate measures to tighten liquidity for fear of economic under-performance.
A recent International Monetary Fund World Economic Outlook report on GDP growth is also fueling market fears. Global growth has been scaled back from 3.5 to 3.1 per cent; economic growth forecasts in BRICS countries – particularly Brazil (loss of half a pecentage point) and China (down 0.3 per cent) – also experienced a downturn.
“[We] are worried about the spillover effect because the emerging countries faced the biggest problems after the announcement of any possible ending of a quantative easing policy, because it weakened their currencies and slowed industrial output,” Siluanov told the media following a meeting of BRICS finance ministers and central bank governors on the sidelines of a two-day G20 meeting in Moscow.
A final communiqué from the G20 meeting said that:
Monetary policy should be directed toward domestic price stability and continue to support economic recovery according to the respective mandates of central banks. We recognize the support that has been provided to the global economy in recent years from accommodative monetary policies, including unconventional monetary policies. We remain mindful of the risks and unintended negative side effects of extended periods of monetary easing. Future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.
Fearing the chaos an end to quantitative easing could have in international markets, US Federal Reserve Chairman Ben Bernanke tried to quell fears that the US would rush to end its economic stimulus regimen.
“We expect that the situation will normalize and the market understand better what are the intentions of American authorities,” he told the media Saturday.
In statements made to Congress on July 18, Bernanke said that the end to monetary easing could come in mid-2014.
But the prospects may not be that grim for BRICS countries. Siluanov told reporters that BRICS countries and their G20 counterparts will communicate about monetary measures to ensure “comprehensible and predictable policy”.
“No cataclysm, no rapid moves will happen,” Siluanov said.
“Qualitative easing is justified at times of economies’ stagnation. The issue is what to do next without risks and implication for economies,” he said. “There are no clear recipes for that, it all will be a subject to conditions.”