KUALA LUMPUR: CIMB Economics Research said if the US Federal Reserve goes ahead with Quantitative Easing Three (QE3), it may cause more harm than good to the US economy.
'More QE will drive the value of the dollar down and pump up asset and commodity prices on the back of speculative buying. With inflation pressures starting to build up, the pumping in of more liquidity would exacerbate current inflation as well as stir up inflation expectations,' it said in a research note on Monday, June 13.
CIMB Research said with still-struggling housing recovery, a slow improvement in the labour market as well as restrictive credit lending, the QE3 can probably do little to lift the US economy.
'The introduction of QE3 would be pretty disastrous as it would lead to rising commodity prices and inflation in the emerging markets,' it cautioned.
The research house said a significant drag on emerging market growth is mounting inflation. Emerging markets now have inflation problems due to a number of factors such as rising commodity prices ' both food and oil.
It added that interest rates were also rising and one should expect more aggressive monetary tightening to keep a tight rein on inflation if QE3 kicks in.
'The QE3 would also trigger fresh flows of funds into the emerging markets, helping to inflate asset prices beyond fundamental valuations as well as drive Asian currencies higher due to the dollar weakness,' it said.
CIMB Research said with policymakers already facing the huge challenge of managing large shifts and volatile capital flows, the QE3 would add more pressure on the central banks in the region to tame upward forces on inflation, asset prices, capital inflows and exchange rates.
It also cautioned that policymakers' errors when responding to the challenges increase the chances of a sudden reversal of flows. The ensuing implication is the collapse of asset prices.
'More QE will drive the value of the dollar down and pump up asset and commodity prices on the back of speculative buying. With inflation pressures starting to build up, the pumping in of more liquidity would exacerbate current inflation as well as stir up inflation expectations,' it said in a research note on Monday, June 13.
CIMB Research said with still-struggling housing recovery, a slow improvement in the labour market as well as restrictive credit lending, the QE3 can probably do little to lift the US economy.
'The introduction of QE3 would be pretty disastrous as it would lead to rising commodity prices and inflation in the emerging markets,' it cautioned.
The research house said a significant drag on emerging market growth is mounting inflation. Emerging markets now have inflation problems due to a number of factors such as rising commodity prices ' both food and oil.
It added that interest rates were also rising and one should expect more aggressive monetary tightening to keep a tight rein on inflation if QE3 kicks in.
'The QE3 would also trigger fresh flows of funds into the emerging markets, helping to inflate asset prices beyond fundamental valuations as well as drive Asian currencies higher due to the dollar weakness,' it said.
CIMB Research said with policymakers already facing the huge challenge of managing large shifts and volatile capital flows, the QE3 would add more pressure on the central banks in the region to tame upward forces on inflation, asset prices, capital inflows and exchange rates.
It also cautioned that policymakers' errors when responding to the challenges increase the chances of a sudden reversal of flows. The ensuing implication is the collapse of asset prices.
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