Pakistan’s central bank governor has warned that emerging markets are vulnerable to a taper tantrum-style shock if advanced economies do not act sooner to manage rising global inflation.
In interview with the Financial Times, The comments by Reza Baqir, a former senior IMF official, signal growing unease among developing-economy policymakers that central bankers in rich countries are not doing enough to rein in pandemic-era monetary stimulus and combat rising prices. This will disproportionately hurt developing countries if foreign investors end up dumping emerging and frontier market assets owing to unexpected interest rate rises in advanced economies, Baqir said.
“If there’s volatility in financial markets because there is a somewhat sudden realignment of expectations of interest rate changes in advanced economies, that volatility will impact emerging markets with high debt and moderate or low levels of reserves more than otherwise,” he told FT. “In Pakistan, we don’t have much presence of foreign investors in our local currency markets,” Baqir told the financial newspaper. “But we could have an impact on the credit, on our sovereign bonds, if fund managers pull out of emerging markets as an asset class.”
Central banks are under pressure to wind back stimulus programmes introduced at the height of the coronavirus pandemic, on concerns that easy money was fuelling sustained global inflation.
Policymakers and investors fear that inaction, followed by abrupt tightening, could spark a repeat of the 2013 taper tantrum when the US Federal Reserve’s signalling of stimulus withdrawal sparked an emerging market sell-off.