The risk of EM central bank overreach

EM central banks have eased their policies aggressively in response to the Covid-19 crisis, some despite worsening economic fundamentals. This is a risky strategy and if DM bond yields keep rising, then global investors will demand greater compensation for increased EM risk. Which EM central banks are more at risk of falling behind the curve and of greater fiscal dominance? Find out from Nomura’s research team as they discuss the broad outlook for EMs, with a focus on EM Asia.

It is well known that the large QE programs since the Great Financial Crisis have swelled the balance sheets of the major DM central banks, but less well-appreciated is how large EM central bank balance sheets have become. Scaled by GDP, we find that 9 of the 20 EM central banks in our study currently have balance sheets larger than that of the Fed.

In response to the Covid-19 crisis, EM central banks aggressively implemented a broad range of measures to ease financial conditions, restore market function and support their economies. Between March and July 2020, the majority of EM central banks slashed policy rates, in many cases to record lows.

The behavior of many EM central banks, by slashing policy rates and following their DM counterparts into the realm of QE raises an important question: have some overreached? In other words, have some EM central banks eased monetary policy too far relative to economic fundamentals? It is true that, while most EM policy rates are at, or close to, record lows, they are not zero or negative like their DM counterparts, and EM QE has also been done on a smaller scale.


  • Rob Subbaraman

    Head of Global Macro Research and Co-head of Global Markets Research

  • Sonal Varma

    Chief Economist, India and Asia ex-Japan

  • Craig Chan

    Global Head of FX Strategy

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