June 14, 2021

The ‘usual suspects’ keep making the same policy mistakes

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Usual_suspects_ver1By Jonathan Garber From Business Insider

When it comes to monetary policy, the conversation in major economies is about whether central banks like the Federal Reserve will raise interest rates too quickly.

But there’s a group of central banks that stand out for a different reason: keeping interest rates too low for too long.

Policymakers in Pakistan, Sri Lanka and Vietnam, specifically, are the “usual suspects” in this case, according to Capital Economics and they’re putting their economic growth at risk.

As oil prices fell sharply at the end of 2014, they dragged inflation in emerging markets down with them. That gave emerging market central banks the chance to keep monetary policy loose, or even cut rates further. As a result, in 2015, both Vietnam and Pakistan experienced their best growth since before the global financial crisis. And while Sri Lanka’s growth didn’t quite make it back to where it was, it still rebounded nicely.

But now, the countries face either a sharp increase in inflation, or an increase in the amount of bad debt, Capital Economics says.

“The longer it takes them to bite the bullet and tighten policy, the worse the repercussions will be,” the analysts write.

Capital Economics says the way things are unfolding in Pakistan is a “textbook example of how not to manage monetary policy.” The central bank has been cutting interest rates to combat a drop in inflation that was caused by supply side factors (ie lower oil prices). However, soon enough year-over-year comparisons for oil will bounce back sharply, pulling inflation numbers higher along with it.

Vietnam and Sri Lanka are facing a different problem. Vietnam still hasn’t recovered from the bankruptcy of its state-owned shipbuilder, and risks another rise in non-performing loans. In Sri Lanka, the central bank unexpectedly hiked rates back in February in an effort to prick a credit bubble that is growing at a 30% year-over-year clip.

Capital Economics speculates Pakistan will be the first place to feel the impact from keeping rates too low for too long, and will soon need to “reverse course soon in order to prevent inflation from getting out of hand.” Meanwhile, a time-table for Vietnam and Sri Lanka are harder to predict. That’s because credit booms “have lasted from as little as two years to as many as nine years” before a crisis has taken hold.

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Central bank ratesCapital Economics

For more on this story go to: http://www.businessinsider.com/vietnam-sri-lanka-pakistan-keeping-rates-too-low-2016-5?utm_source=feedburner&amp%3Butm_medium=referral&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29

Top Image: en.wikipedia.org  “The Usual Suspects”

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