Moody’s warns of risks in rolling back QE

MOODY’S INVESTORS Service said emerging markets face risks in the timing of their unwinding of quantitative easing (QE) measures as economies recover.

“Extending quantitative easing when an economic recovery is already underway would make it more difficult to roll back, especially if not supported by strong institutional frameworks. On the other hand, prematurely withdrawing quantitative easing could tighten financial conditions and jeopardize a nascent recovery,” Moody’s said in a note Wednesday.

It added that risks from quantitative easing and the unwinding process will depend on institutional frameworks and macroeconomic fundamentals, noting that emerging economies have varying debt servicing capacities.

“Prolonged use of (QE) also heightens the risk that a government will use monetary policy to monetize debt. The erosion in central bank independence, and escalation of inflation expectations and loss of investor confidence, would have a destabilizing effect on the exchange rate,” it said.

Moody’s noted the Bangko Sentral ng Pilipinas (BSP) implemented QE through its repurchase agreement with the National Government and bond purchases in the secondary market.

BSP Governor Benjamin E. Diokno has said the bank has extended the maturity of the P540-billion zero-interest loan it granted to the National Government by another three months. It was originally supposed to have been repaid in March, although another threemonth extension is allowed by the Bayanihan II economic stimulus law.

Mr. Diokno also said the bank will carefully assess the timing of the QE exit in order to maintain financial stability.

“So far we have not seen core inflation in emerging markets accelerating as a result of these programs, because of the wider effects of a shortfall in overall demand,” Moodys said.

Philippine gross international reserves hit $105.16 billion at the end of February, sufficient to cover 12 months’ worth of imports of goods and payments for services. It can also cover 7.5 times short-term foreign debt based on original maturity and 5.2 times based on residual maturity.

Inflation was 4.5% in March, above the 2-4% target but lower than the 4.7% in February. Core inflation, which strips out volatile items like food and oil, was at 3.5%.

Central bank officials have said the recent uptick in inflation is not demand-driven and is caused by price pressures from low supply which are better addressed by non-monetary measures. —