Today’s decision by the People’s Bank of China to lower reserve requirements underlines the current heightened risk of policy surprises in the EM world. We continue to think that any further surprise moves are more likely to be directed towards looser rather than tighter policy but with two important caveats. First, the window for central banks to loosen is likely to be small. Second, in EMs with balance of payments or inflation problems (e.g. Turkey) any policy loosening could be quickly reversed.
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