G20 To Warn On Spillover From Monetary Tightening-document
Emerging markets must brace for monetary tightening in the United States and Europe while central banks must be clearer in their policy communication to avoid confusion, financial leaders of the world's 20 biggest economies are likely to warn this week.
G20 finance ministers and central bank governors are to meet on Feb 17-18 in Jakarta. Global divergences in the post-pandemic recovery, a global corporate tax and financing the fight against climate change will be at the top of their agenda.
"I think the most important discussion will be on inflation developments," one European G20 official involved in preparations for the meeting said.
Asked what the G20 message could be, he said: "The formula that will be agreed is that central banks in advanced countries are mindful of potential spillovers to emerging markets and developing countries and they will have well calibrated policies and communication about it."
"And at the same time I think emerging markets will say that they're working towards increasing their resilience from financial markets," the official said.
With inflation in the United States at multi-decade highs and at a record level in the 19 countries sharing the euro, both the U.S. Federal Reserve and the European Central Bank have signalled they would be tightening policy through diminishing bond purchases and rate hikes.
But this could trigger an outflow of capital from emerging markets like Brazil, South Africa, or Russia, leading to their currency depreciating, higher interest rates and a more difficult recovery, the International Monetary Fund has warned.
CLEAR CENTRAL BANK COMMUNICATION
Communicating central bank policy is also a challenge, as an unexpected change in messaging from the ECB last week caught markets by surprise. While the U.S. Federal Reserve in January clearly telegraphed a March interest rate hike, the pace of what is to follow is clouded.
The G20 are likely to call on the Fed, the ECB and other major central banks to tell markets as clearly as possible what they intend to prevent sudden market swings.
"Transparent and clear monetary policy communication by major central banks remains important for the global economy, price stability and financial stability," said a document with the agreed position of European G20 members, seen by Reuters.
To address the potential spill-overs to emerging markets of tighter monetary policy in the U.S. and Europe the IMF called in January for emerging economies to start working on defences now, reducing levels of debt in foreign currencies, hedging exposure, extending maturities to cut roll-over risk and prepare for bankruptcies of banks and companies.
The same message is likely to come from the G20 meeting this week, the European document showed.
"(G20) members, notably emerging markets and developing economies, should continue ... efforts to reduce vulnerabilities in order to be able to withstand a tightening of international financing conditions," it said.
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