Bringing you live news and features since 2006 

QE2 likely to fuel higher inflation in emerging markets, says LGIM

RELATED TOPICS​

Recent moves by the Federal Reserve to inject another round of quantitative easing stimulus into the US economy has the potential to fuel higher inflation and the potential for asset price bubbles in the emerging markets, according to Brian Coulton, emerging markets strategist at Legal & General Investment Management.



Speaking at LGIM’s Fundamentals briefing, Coulton said the divergence between monetary policy activity in the emerging and developed world is growing.

While official interest rates are heading higher across emerging markets in Asia to combat mounting inflation concerns, western policy makers are doing everything they can to support a weak recovery and ward-off deflation.

Coulton outlined why this divergence in policy objectives has intensified long-standing tensions surrounding trade imbalances and exchange rate policies.

“Asian central banks have been directly intervening in foreign exchange markets, limiting currency appreciation. This has been undermining the relative competitiveness of their trading neighbours in Europe and Japan. As a result of further QE, the US dollar could weaken, further exacerbating this problem”.

Emerging markets have been very resilient to the global financial crisis. Private capital flows to emerging markets as a whole have risen sharply this year as investors seek higher levels of yield and greater potential for capital gain.

“With capital inflows rising, a stance of ‘no change’ in exchange rate policy would also require a stepped up pace of foreign exchange reserve purchases – and therefore increased scrutiny from trading partners,” said Coulton.

As a result, a number of emerging economies – Brazil and Colombia for example – have imposed controls on capital inflows in the form of higher taxes or reserve requirements during the past two years.

Coulton said: “In emerging Asia, tightening efforts are likely to be broader including limiting domestic banks’ short-term foreign borrowing and restricting foreign exchange lending to residents. However, the effectiveness of these tightening measures remains uncertain and higher interest rates and faster currency appreciation through the region seem inevitable as inflationary pressures mount.”

Latest News

REX Shares has announced a strategic reorganisation that integrates its REX Shares, MicroSectors, and T-REX products, as well as REX..
Allspring Global Investments writes that as it builds an investment platform for the future, it has filed for exemptive relief..
LSEG Lipper writes that ETF promoters in Europe enjoyed estimated net inflows (+EUR25.1 billion) for May 2024...
The European Fund and Asset Management Association (EFAMA) has published its 2024 industry Fact Book, which includes a foreword by..

Related Articles

Marcus Wayerer, Franklin Templeton
Franklin Templeton says that emerging markets are navigating a tricky environment at the moment, due to factors such as the...
Matt Barry, Touchstone Investments
Back in 2022, Cincinnati, Ohio-based Touchstone Investments launched its first four ETFs, having previously been predominantly a mutual fund company....
CN Tower, Toronto
The winners were announced in the second ETF Express Canadian awards at the event held at The Quay in Toronto,...
Darren Jordan, Komainu
Custody specialist, Komainu, was launched in 2018 as a joint venture between Nomura, digital-asset investment manager, CoinShares and blockchain business,...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by