In recent weeks, the Fed and the ECB have begun sounding a tad more hawkish, but official monetary policy is still extremely accommodative.
But outside of the developed world, emerging markets are in the full throes of the opposite of QE, quantitative tightening (QT), as noted in the latest edition of Morgan Stanley’s Global Monetary Analyst.
The key idea here is that just as QE is a way of loosening monetary policy without adjusting the headline policy interest rate, QT represents various methods of tightening policy without aggressively hiking interest rates. A key thing to think about is that while these countries want to cool their overheating economies, they don’t want to see their currencies surge (remember currency wars?).
The Chinese strategy is the most well known, as the PBOC has been trying to slow down credit growth through a series of bank reserve requirement ratio (RRR) hikes.
Other central banks have taken a different approach.
Hikes in the IOF tax as policy rates have been hiked are designed to reduce the attractiveness of the carry trade (see “Brazil: Taxing Flows”, This Week in Latin America, March 28, 2011). In addition, reserve requirements have been hiked in order to reduce liquidity in money markets. Collectively, the Brazilian authorities are trying to directly soften capital inflows by making high interest rates in Brazil less attractive, reduce liquidity in the money markets and slow the economy down to prevent overheating. The monetary policy stance is likely to move into a slightly restrictive one over the course of 2011.
Or take Turkey, where interest rates and reserve ratio requirements have actually gone in different directions:
Turkey offers the most interesting (but also most complicated) policy setting in the EM world, in our opinion. Reserve requirements have been raised sharply in a highly nuanced manner. They have climbed 800bp for deposits maturing up to three months, and less so further out. These changes affect institutions with a local presence in Turkey. In order to sharply reduce the incentives for foreign players sending portfolio flows into Turkey, the policy rate was cut by 75bp in conjunction with reserve requirement hikes in order to weaken the currency. The signaling aspect of such a cut has clearly played a strong role in driving market perception because investors tend to see Turkey’s monetary policy as expansionary. However, the net result of QT and policy rate cuts has likely been to make Turkish monetary policy tighter, not looser. The removal of over TRY 40 billion (US$26 billion) from the money markets means that policy is already slightly restrictive, a far cry from the picture painted by cuts in the policy rate (see “Turkey: A Q&A on Monetary Policy”, CEEMEA Macro Monitor, March 28, 2011).
This chart of RRR around the world is useful:
Photo: Morgan Stanley
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