IMF asks emerging economies to be ready for Fed interest rate hikes

The International Monetary Fund (IMF) warned emerging economies about a possible hike in interest rates from the Federal Reserve Board (FED) of the United States.

According to the international body, faster-than-expected cycles in the Federal Reserve could shake financial markets and trigger capital outflows, as well as a depreciation of their currencies.

In a blog posted Monday, the IMF said it expects strong US growth to continue and that inflation will likely moderate later in the year. The agency will publish its new global economic forecasts on January 25.

Along these lines, the group led by Kristalina Georgieva pointed out that a gradual and well-communicated tightening of the Fed’s monetary policy would probably have little impact on emerging markets, as foreign demand would offset the impact of rising financing costs.

However, widespread wage inflation in the United States or sustained supply bottlenecks could drive prices higher than anticipated and fuel expectations of rampant inflation, prompting more frequent rate hikes by the US central bank. .

“Emerging economies should prepare for possible episodes of economic turbulence,” the IMF said, citing the risks posed by faster-than-expected Fed rate hikes and a resurgence of the pandemic.

As recalled, St. Louis Fed Chairman James Bullard said this week that the Fed could raise interest rates as early as March (months earlier than expected), and that the body is now in a ” good position ”to take even more aggressive measures against inflation, as needed.

“Accelerated Fed rate hikes could shake financial markets and tighten financial conditions globally. These developments could come alongside a slowdown in US trade and demand and can lead to capital outflows and currency depreciation in emerging markets, ”IMF experts wrote.

IMF on monetary policy

For the IMF, emerging markets with stronger inflationary pressures or weaker institutions should act quickly to allow currencies to depreciate and raise benchmark interest rates.

He urged central banks to clearly and consistently communicate their plans to tighten monetary policy, and said countries with high levels of foreign currency-denominated debt should seek to hedge their exposures when feasible.

Governments could also announce plans to increase fiscal resources by gradually increasing tax revenues, implementing pension and subsidy reviews or other measures, he added.