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BIS Suggests Interventions, Regulation for Tackling Hot Money

BIS Suggests Interventions, Regulation for Tackling Hot Money

(Bloomberg) -- Foreign exchange interventions and macroprudential policy are tools available to emerging-market central banks for coping with hot money flowing through their economies, according to the Bank for International Settlements.

Emerging markets are frequently buffeted by in- and outflows of foreign capital, which can affect exports and asset prices, and feed through to inflation. That makes them susceptible to shocks if those flows suddenly change.

BIS Suggests Interventions, Regulation for Tackling Hot Money

The Asian financial crisis two decades ago erupted when Thailand abandoned its currency peg, and more recently, Turkey suffered a slump in the lira and a market rout in 2018 after it was hit with U.S. sanctions. In recent years, interest rates in major economies have sent investors overseas in search of yield, ultimately leading to a buildup of indebtedness in emerging markets.

“In some places, the debt is already approaching a level where yellow lights are blinking, though not red yet,” BIS General Manager Agustin Carstens said in an interview accompanying the institution’s annual economic report.

Read more: emerging economies need new tools for hot money, BIS Says

The BIS has long called for higher interest rates to prevent asset-price bubbles, yet in the publication suggested central banks think about using macroprudential tools to address financial system imbalances.

“The experience of the past two decades indicates that macroprudential measures do help improve the trade-offs monetary policy faces, including those in connection with capital flow and associated exchange rate fluctuations,” according to the BIS.

To contact the reporters on this story: Anna Andrianova in Moscow at aandrianova@bloomberg.net;Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, David Goodman

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