November/December 2012

Summary:

• Effects of quantitative easing on emerging markets weakening
• Fiscal cliff looming for the United States
• Economic situation in Japan deteriorates further 
• Signs of a mild strengthening of economic activity in China

The initial rounds of quantitative easing (QE) by developed country central banks in 2008 and 2009 are estimated to have had mixed effects on emerging market economies (EMEs). Brazil, among others, faced sudden and strong inflows of hot money causing currency appreciation. The real appreciated by more than 35 per cent over that period, perhaps exacerbating the general slowdown in exports during that time. Asian EMEs showed more limited appreciation pressures and substantial reductions in government bond yields. Hong Kong Special Administrative Region of China (where the exchange rate is managed by a currency board) felt strong effects on equity prices and bank credit.

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