China started it.
Quantitative tightening has been bandied about recently as the way in which the People’s Bank of China is combating QE. At a time when rate hikes may not be enough, other tools have to be considered for dealing with surging capital inflows in search of Chinese yield.
Yes, China started this practice of odd emerging central bank behaviour. But we wonder if it’s catching on and being re-purposed elsewhere.
Here’s Nomura on what it calls signs of ‘postmodern monetary policy’ in emerging Europe and the Middle East. It’s a very apt phrase describing the confusion in some central bank quarters. And it looks very familiar:
On balance, we see EEMEA central banks erring on the side of loose policy, even at the expense of higher inflation. Where there is concern about capital inflows, various policy tools are being used to decrease the carry appeal while not easing monetary conditions as much as rate cuts (or postponed hikes)…
Turkey‘s recent 400bp cut in the borrowing rate (and leaving the lending rate unchanged), while at the same time raising reserve requirements is one of the best examples of this creative policy in practice. Israel‘s efforts to ensure that implied forward rates remain at least 100bp below policy rates, or the Central Bank of Romania‘s operations in the basis swap market to minimise speculative capital flows are others. Meanwhile, the South African Reserve Bank appears to be maintaining an easing bias, despite real rates approaching negative territory, as it attempts to balance its concerns about the strength of the currency with stimulus being provided via looser fiscal policy. And in Hungary, the need for risk premia to secure inflation expectations against government policy changes is now leading to rate hikes, where none would have been expected otherwise…
China’s almost got it easy, considering. Full note in the usual place.
Related links:
Post-modern fiscal and monetary policy - FT Tilt
Here come the hot inflows into China – FT Alphaville