Emerging markets vulnerable to a taper tantrum-style shock: SBP governor

State Bank of Pakistan (SBP) Governor Dr Reza Baqir 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, reported the Financial Times.

His statement comes on the heels of the central bank adopting a more aggressive stance, raising the key interest rate by 150 basis points to take it to 8.75% — the highest since April 2020. The decision comes amid higher inflation in Pakistan that has gone over 9%, with hike in global energy prices cited as among the top reasons.

His remarks 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, added the report.

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 in an interview with the Financial Times.

Central banks, much like Pakistan's, are under pressure to wind back the stimulus programmes introduced during the coronavirus pandemic over concerns that easy money was fuelling sustained global inflation.

Policymakers and investors fear that inaction 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.

Unexpected level of current account deficit, inflation led to hike in policy rate: Dr Reza Baqir

Baqir added that if there is volatility in financial markets due to 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”.

Pakistan’s foreign exchange reserves have already come under pressure in the past six months as a growing import bill takes toll on the economy. Imports have surged with the current account deficit posting an over $5-billion deficit during the first four months of current fiscal year (FY22).

“In Pakistan, we don’t have much presence of foreign investors in our local currency markets,” the governor said.

SBP hikes rate by 150bps to 8.75pc on inflation, BoP

“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.”

Meanwhile, vice-chair of the Federal Reserve Richard Clarida has said that the bank was open to faster tapering of its bond-buying stimulus programme, owing to the upside risk to inflation.

“Gradually, central banks around the world are moving towards a realisation that there is a justifiable reason to be proactive about moderating monetary stimulus," said Baqir.

“For emerging markets with high debt, with reserve levels not where they would like them to be, they don’t have the luxury of waiting as much as those central banks that issue hard currencies have.”