Ample global liquidity triggered capital flows into EM countries, in many cases encouraging public and private leveraging and fuelling credit growth. Such developments would typically prompt a policy response in the form of higher interest rates. However, with interest rates differentials with AEs a key driver of portfolio flows and currency appreciation, some EM central banks found themselves facing increasingly complex challenges.
Despite the current delay in the Fed’s expected monetary policy normalisation path, the Fed and the Bank of England (BoE) are expected to be the first AEs to increase their policy rates. Against this background, it still appears that monetary policy paths will differ amongst major central banks, in terms of the trend, timing and pace, adding to the uncertainty in global financial markets.