Two major central banks – the Federal Reserve (Fed) and the European Central Bank (ECB) – sent very strong signals during the week that both stand ready to slash interest rates and pump liquidity to address the prevailing market and economic strains. Although the Fed and the ECB could opt for the same resolution (i.e. loosening financial conditions), the two will do so for very different reasons: the Fed needs to provide comfort to market players globally in the context of slowing growth and international trade tensions, whilst the ECB needs to address the Eurozone’s structural deficiencies with tools that can only manage cyclical woes. Meanwhile, the Bank of Japan has not even had the chance to consider the reversal of its ultra-accommodative stance. Therefore, we are stuck in an era of #QEinfinity, where central banks (need to) step up, while governments stay on the side lines instead of delivering structural reforms.
What does this mean in the world of emerging markets if the Fed (and the ECB) deliver dovish measures? Simply put, central banks in emerging countries will have greater flexibility to opt for more accommodative policies, which in turn will prop up economic growth and support asset prices.
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