The unparalleled nature of the response to the COVID-19 crisis – indiscriminately triggering sudden-stops across economies – suggest that some emerging markets could be closer to crossing the Rubicon into full-blown QE. Many EM central banks already purchase government bonds on a periodic basis, although this is typically to support domestic liquidity conditions or ensure smooth market functioning for government securities. The lack of explicit purchasing targets or intention to institute portfolio rebalancing, differentiate current EM central bank operations involving sovereign bonds from traditional QE.
In thinking about what could trigger the shift into QE, it is worth remembering why DM central banks first pursued this policy. In the face of a severe demand shock and private sector deleveraging, QE became the natural progression for monetary policy to lower longer-term policy rates and support lending to the real economy after policy rates hit the lower bound. With policy rates in many EMs now close to, or approaching, zero, and faced with an unprecedented demand shock alongside widespread use of unorthodox monetary policies, EM QE could be closer than many think, and provide a stronger back-stop to EM fixed income.
Source: Bloomberg, Macrobond and Variant Perception