US Federal Reserve interest rate decisions may raise borrowing costs quickly, says IMF
The IMF is warning emerging economies against blindly following the US Federal Reserves’ interest rate decisions this year, saying: “Policymakers may need to react by pulling multiple policy levers.”
Prices have been rising rapidly for almost four decades, and now the tight labor market has started to feed into wage increases, according to an analysis by IMF officials released on Monday.
Underlining that some emerging economies have already taken some steps to adjust monetary policy, the IMF said amid tighter funding conditions, emerging markets should tailor their response based on their own circumstances and vulnerabilities.
“The Federal Reserve referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases,” the analysis said.
The analysis said Fed tightening could have a severe impact on vulnerable countries, adding: “In recent months, emerging markets with high public and private debt,foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar.
“The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies.”
It added that the Fed’s moves would raise borrowing costs quickly.
“Emerging-market currencies may still depreciate, but foreign demand would offset the impact from rising financing costs,” it added.
Stressing that fiscal policy can contribute to resilience against shocks in emerging economies, it said: “Setting a credible commitment to a medium-term fiscal strategy would help boost investor confidence and regain room for fiscal support in a downturn.”