Mexican deputy Sánchez takes stock of easy policy in advanced economies

Large central bank balance sheets and negative interest rates may be generating "significant" costs and risk, Manuel Sánchez, a Bank of Mexico deputy governor said on May 13.

"The combination of negative rates and balance sheet expansion has resulted in ever-increasing proportion of government debt carrying a negative yield," he told an audience at the National Asset-Liability Management conference in Mexico City.

Looking at a sample of eight European countries with at least one negative rate, as well as Japan and the Czech Republic, Sánchez noted a third of outstanding government debt is estimated to carry a negative yield.

Emerging markets benefited from increased portfolio capital inflows, rising commodity prices and appreciating financial assets following the crisis, but are beginning to experience a negative impact from easy policies abroad.

"Advanced economy monetary accommodation first led to favourable conditions in emerging market economies," Sánchez said, but "the tables have now turned".

In response, emerging markets have responded by loosening their own monetary policy and accelerating foreign exchange reserve accumulation, he said. Sánchez stressed the need to continue to prepare for "less benign" times.

"Emerging markets must deal with current imbalances and strengthen economic fundamentals which should include appropriate implementation of monetary policy, fiscal policy and structural reforms," he said. He pointed to Mexico's own "ambitious" structural reform programme.

Sánchez examines outlook for monetary policy for advanced economies – click to watch video

Future of monetary policy

Monetary policy in advanced countries was at a crossroads, Sánchez said. "Unsatisfactory results from monetary accommodation will likely lead to more gradual normalisation and even further easing in some countries," he added.

He also noted monetary policy divergence between the major economies is also likely to continue, which could produce "significant volatility" in the years to come.

"It is likely balance sheets will not diminish in the near term, they may even expand in some places," he said. "Negative interest rates could also become more prevalent and could fall further."

All these measures, he said, will make eventual unwinding more "complex" and "riskier" in terms of price and financial stability. When asked if monetary policy co-ordination was the answer, Sánchez hesitated.

"In theory, the value [of policy co-ordination] is high. In practice it is very difficult. Every country has different problems and is at different stages in the economic cycle," he said, noting central banks sometimes find it hard to meet their mandate even in the "best environments", let alone in a world where co-ordination is required.