The IMF says emerging economies must prepare for the tightening of Fed policy

A participant stands near a logo for the IMF at the International Monetary Fund – World Bank Annual Meeting 2018 in Nusa Dua, Bali, Indonesia, 12 October 2018. REUTERS / Johannes P. Christo

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WASHINGTON, Jan. 10 (Reuters) – Emerging economies need to prepare for US interest rate hikes, the International Monetary Fund said, warning that faster-than-expected Federal Reserve movements could rattle financial markets and trigger capital outflows and currency fluctuations abroad.

In a blog published on Monday, the IMF said it expects robust growth in the United States to continue, with inflation likely to decline later in the year. The global lender is set to release new global economic forecasts on January 25th.

It said that a gradual, well-telegraph tightening of US monetary policy is likely to have little impact on emerging markets, with foreign demand offsetting the impact of rising financing costs.

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But broad-based US wage inflation or persistent bottlenecks in supply could increase prices more than expected and fuel expectations of faster inflation, triggering faster rate hikes by the US Federal Reserve.

“Emerging economies should prepare for potential attacks of economic turbulence,” the IMF said, referring to the risk posed by faster-than-expected Fed rate hikes and the resurgent pandemic.

St. Louis Fed President James Bullard said this week that the Fed could raise interest rates as soon as March, months earlier than previously expected, and is now in a “good position” to take even more aggressive steps against inflation, as needed.

“Faster Fed rate hikes could erode financial markets and tighten financial conditions globally. This development could lead to a decline in US demand and trade and could lead to capital outflows and currency depreciation in emerging markets,” senior IMF officials wrote in the blog.

It said emerging markets with high public and private debt, currency exposure and lower current account balances had already seen greater movements in their currencies against the US dollar.

The fund said that emerging markets with stronger inflationary pressures or weaker institutions should act quickly to allow currencies to weaken and raise benchmark interest rates. It called on central banks to clearly and consistently communicate their plans to tighten policies, and said that countries with high levels of debt denominated in foreign currency should look to secure their exposures where possible.

Governments may also announce plans to increase tax resources by gradually increasing tax revenues, implementing pension and subsidy overhauls or other measures, it added.

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Reporting by Andrea Shalal; Editing Lincoln Feast.

Our standards: Thomson Reuters Trust Principles.

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