Recent respite for China, on which other emerging markets are highly leveraged, could be short-lived
Suddenly it seems that emerging-market economies have gained a respite. Capital flows to these economies dried up in the second half of last year as the US Federal Reserve raised its policy rate for five consecutive quarters and shrank its balance sheet. But in January, the Fed announced a pause, which now looks to be extended: the dot plots of Federal open market committee members currently indicate no rate rises for the remainder of the year. Moreover, the Fed has signalled that “quantitative tightening”, the process of allowing treasuries and mortgage-backed securities to roll off its balance sheet, will continue only through September.
This means merciful relief for emerging economies, which have been buoyed by the resumption of capital inflows. A replay of the second half of last year, much less of the 2013 “taper tantrum”, now seems unlikely.