LONDON (Reuters) - Calls for central banks in advanced economies to raise interest rates to discourage investors building up leverage in emerging market assets could be misguided, a deputy governor of the Bank of England said on Saturday.
Speaking at a panel at the International Monetary Fund conference in Lima, she said it was preferable to use macro prudential tools rather than monetary policy when targeting global financial risks.
“The risk inherent in this build up of leverage (in emerging markets) has motivated calls for a normalisation of advanced economy monetary policy sooner rather than later,” said Minouche Shafik, who was a deputy managing director at the IMF before joining the BoE last year.
“But tightening advanced economy monetary policy solely to discourage further borrowing could make the job of getting inflation back to target more difficult.”
Investors have piled into higher-yielding emerging market assets in recent years, as they sought higher returns against the backdrop of record low interest rates in major economies.
There are concerns that when major central banks begin raising borrowing costs, capital may flee emerging markets which are already struggling amid concerns about a Chinese economic slowdown.
Reporting by Ana Nicolaci da Costa, editing by David Evans