G-20 Draft Says QE Withdrawal Volatility Poses ‘Important Risk’Kasia Klimasinska and Simon Kennedy
The Group of 20 economies identified market turmoil from central banks’ withdrawal of monetary stimulus as a key risk to the global financial system, according to a draft communique for talks scheduled later this week.
“Excessive market volatility and tightening of financing conditions in response to an approaching eventual transition toward the monetary policy normalization in advanced economies is an important risk,” according to the preliminary statement, which was marked as a first draft and obtained from a participant in the talks. “We will ensure that future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.”
The draft will be used as a basis for discussions scheduled Oct. 10-11 in Washington of G-20 finance ministers and central bankers, and a final communique is typically released after the meetings. The gathering coincides with the annual meetings of the International Monetary Fund and the World Bank.
“While the global recovery continues, it remains uneven and fragile, with unemployment being unacceptably high in many countries,” the draft states. “There are signs of improvement in major advanced economies and evidence of slower growth in some emerging markets.”
The intention of G-20 policy makers to communicate transparently comes almost a month after the Federal Reserve surprised investors by deciding not to trim its $85 billion-a-month asset-purchase program.
Previous signals from Fed officials, including Chairman Ben S. Bernanke, that they may curtail the third round of quantitative easing prompted calls from the IMF, China and Mexico for the U.S. to better communicate or even cooperate when planning to curtail stimulus.
A group of the 20 most-traded emerging-market currencies last month fell to the lowest since 2009 and dollar bonds in such nations dropped the most in five years in the second quarter as measured by JPMorgan Chase & Co.’s EMBI Global Diversified Composite Index. Both gauges rebounded after the Fed decided to maintain the pace of bond purchases.
The concern of emerging markets is that when the Fed does begin tapering its bond buying, it could hurt them by sparking an exodus of cash and higher borrowing costs. Brazil, Turkey, South Africa, India and Indonesia are the most vulnerable, Goldman Sachs Group Inc. strategists said in a Sept. 5 report.
Other major central banks are pledging to maintain stimulus in part to ensure investors don’t force up their market borrowing costs in step with the U.S. The European Central Bank has pledged to keep its key interest rate at 0.5 percent for an “extended period,” while the Bank of Japan is trying to expand its monetary base by 60 trillion to 70 trillion yen in a bid to generate 2 percent inflation.
The Bank of England has pledged to keep its benchmark at 0.5 percent until unemployment drops to 7 percent so long as price and financial stability aren’t threatened.
The IMF will tomorrow update its forecasts for the world economy, having previously predicted expansion of 3.1 percent this year and 3.8 percent in 2014. Managing Director Christine Lagarde last week said global growth “remains subdued.”
In the draft G-20 statement, the group also restated the need to ratify quota changes at the IMF and pledged to ensure a “safe and reliable financial system by addressing the major fault lines that caused the crisis.”