Emerging markets should be prepared for crisis

THE Federal Reserve's widely expected decision to increase the federal funds rate by 25 basis points yesterday marks an important step in what OMFIF called a "point of inflection" from monetary to fiscal policy in the October edition of our monthly Bulletin.

Resuming a tightening path that began with former chair Ben Bernanke's "taper tantrum" in 2013 but paused in 2016, the Fed joins other major central banks in scaling back the extraordinarily loose and unconventional monetary measures adopted in the wake of the Great Recession. The Bank of Japan's decision to refrain from a rate cut and introduce yield curve controls in asset purchases in September, for example, confirms a shift to a more flexible approach.

Similarly, the European Central Bank's decision on Dec 8 to trim the scale of monthly asset purchases from 80 billion euros to 60 billion euros reflects a belief by the Governing Council that the alarming deflationary conditions that led it to upsize the programme in March 2016 have largely disappeared. The Bank of England may soon have to follow suit. Annual consumer price inflation reached a two-year high of 1.2 per cent in the latest data released this week. Inflation expectations in the BOE's quarterly inflation report from November suggest that, without tightening, inflation could rise sharply above the 2 per cent target within the next six months.