IMF: emerging economies must prepare for Fed tightening monetary policy

Emerging economies should prepare for US interest rate hikes, the International Monetary Fund (IMF) said, warning that faster-than-expected cycles from the Federal Reserve (Fed) could shake financial markets and trigger outflows. of capital and a depreciation of its 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.

He indicated that a gradual and well-communicated tightening of the Fed’s monetary policy would likely have little impact on emerging markets, as foreign demand would offset the impact of rising financing costs.

But widespread wage inflation in the United States or sustained supply bottlenecks could boost prices more 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.

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 agency is now in a “good position” to take even more aggressive measures against inflation, as necessary.

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

The document added that emerging markets with high public and private debt, currency exposures and lower current account balances had already seen greater depreciation of their currencies relative to the dollar.

The Fund said 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.