IMF says emerging economies should prepare for Fed policy tightening

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WASHINGTON, Jan. 10 (Reuters) – Emerging economies must prepare for a hike in U.S. interest rates, the International Monetary Fund said, warning that faster-than-expected moves by the Federal Reserve could shake financial markets and trigger capital outflows and currency depreciation abroad.

In a blog posted on Monday, the IMF said it expected robust US growth to continue, with inflation expected to moderate later in the year. The global lender is due to release a new global economic forecast on January 25.

He said a gradual and well-announced tightening of US monetary policy would likely have little impact in emerging markets, with foreign demand offsetting the impact of rising funding costs.

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But widespread US wage inflation or lingering bottlenecks could push prices up more than expected and fuel expectations of faster inflation, triggering faster rate hikes by the US central bank.

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

St. Louis Fed Chairman James Bullard said this week the Fed could raise interest rates as early as March, months earlier than expected, and is now “in a good position” to take further action more aggressive against inflation, if necessary.

“Faster rate hikes by the Fed could shake financial markets and tighten financial conditions globally. These developments could be accompanied by a slowdown in US demand and trade and could lead to capital outflows. and currency depreciation in emerging markets, “senior IMF officials wrote in the blog.

He said emerging markets with high public and private debt, currency risks and lower current account balances had already seen larger movements of their currencies against the US dollar.

The fund said emerging markets with stronger inflationary pressures or weaker institutions should act quickly to let currencies depreciate and raise benchmark interest rates. He urged central banks to clearly and consistently communicate their plans for policy tightening, and said countries with high levels of foreign currency denominated debt should seek to hedge their exposures to the extent possible.

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

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Reporting by Andrea Shalal; Editing by Lincoln Feast.

Our standards: Thomson Reuters Trust Principles.

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