IMF: ‘herdlike’ behaviour driving global capital flows

IMF Managing Director Christine Lagarde and Singapore Minister of Finance and International Monetary and Financial Committee chairman Tharman Shanmugaratnam at the 2014 Spring Meeting of the IMF and the World Bank Group yesterday in Washington, DC.

AFP

Washington

Global capital flows are increasingly “herdlike” and volatile, making it harder for emerging economies to lock down capital, the International Monetary Fund said yesterday.

The increased global power of bond funds, mutual funds and exchange traded funds, often underpinned by the savings of small investors, has made capital flows more fickle and risk-sensitive.

That means countries on the receiving end have to work harder to hold onto capital, said Tharman Shanmugaratnam, chair of the IMF’s steering committee, the International Monetary and Financial Committee.

Speaking at the end of the spring meeting of Fund members, Tharman said they singled out increased volatility in capital movements as one of the key challenges for the global economy.

“That’s not going to be a short term phenomenon, that’s going to be a continuing challenge,” he said.

“It’s partly reflecting a change in the structure of global finance - more capital flows, and also a changed composition, with a greater share that’s been taken up by bond funds, a greater share that’s been taken up by mutual funds, ETFs.”

That composition often also represents the interests of retail investors who Tharman said “tend to be a little more jittery.”

What we have observed is more herdlike behaviour in the markets, more herdlike behaviour driving capital flows.”

This translates to more frequent, more sudden reactions to changes in risk perception.

Tharman said that emerging economies, which have suffered sharp outflows of foreign capital over the past year, as well as advanced economies must protect themselves by implementing structural reforms that will assure investors and help generate jobs over the long term.

Reforms include balance sheet repairing, banking systems, including in Europe, as well as “improving the functioning of labour markets so as to reduce the extraordinarily high levels of youth unemployment in many parts of the world,” he said.

lThe European Central Bank will ease monetary policy further if the euro keeps strengthening, President Mario Draghi said yesterday as world finance chiefs ramped up pressure on Europe to ward off deflation.

In the clearest signal yet the ECB was prepared to launch a stimulative asset-purchase programme, Draghi said the euro’s exchange rate had become increasingly important to policy and would act as a trigger.

“The strengthening of the exchange rate would require further monetary policy accommodation. If you want policy to remain as accommodative as now, a further strengthening of the exchange rate would require further stimulus,” he told a news conference.

The issue of weak eurozone inflation took centre stage at meetings of top finance ministers and central bankers yesterday, with the International Monetary Fund’s steering committee urging the ECB to consider acting if low inflation became persistent.

“The Fund is recommending more monetary easing to the ECB, and rightly so,” said Guido Mantega, Brazil’s finance minister.

The world’s financial markets are watching closely. Last week, the ECB kept interest rates steady but opened the door to turning on its money-printing presses to boost the weak eurozone economy and inflation. At that time, Draghi said the ECB had achieved unanimity that asset purchases, or so-called quantitative easing, might be needed.