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IMF warns emerging economies to brace for Fed rate hike

Global markets have been angsty on worries of a March rate hike

India recognises the need for environmentally sustainable development strategy: IMF [File] | Reuters

The International Monetary Fund (IMF) has warned emerging economies to prepare for US interest rate hikes. The message comes as global markets have already started reacting over worries of a rate hike in March.

In a blog post, the IMF noted the fast rate of inflation in the US and the additional concerns posed by the Omicron variant. It said the outlook for emerging markets was uncertain, as they too confront elevated inflation and substantially higher public debt.

“Should policy rates rise and inflation moderate as expected, history shows that the effects for emerging markets are likely benign if tightening is gradual, well telegraphed, and in response to a strengthening recovery. Emerging-market currencies may still depreciate, but foreign demand would offset the impact from rising financing costs,” the IMF said

“Even so, spillovers to emerging markets could also be less benign. Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally. These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.”

Noting that some emerging markets had already started adjusting their monetary policies and are preparing to scale back fiscal support to address rising debt and inflation, it said they should tailor their response based on their circumstances and vulnerabilities.

Markets show mixed reactions

Global shares were mixed Monday after Wall Street fell on worries of a rate hike.

Frankfurt and Shanghai advanced. Wall Street futures were higher. Seoul declined while London was little-changed. Japanese markets were closed for a holiday.

Investors were rattled last week after notes from the latest Fed meeting showed officials thought the US job market is healthy enough to no longer need ultra-low interest rates and other stimulus.

That was reinforced by US employment numbers Friday that showed stronger-than-expected wages, though with only about half as much hiring as forecast.

The prospect of earlier rate hikes suggests that markets could continue to be roiled by volatility, Tan Boon Heng of Mizuho Bank said in a report.

In early trading, the DAX in Frankfurt gained 0.1% to 15,967.95 while the FTSE 100 in London was little-changed at 7,486.65. The CAC 40 in Paris also was flat, at 7,220.20.

On Wall Street, futures for the benchmark S&P 500 index and the Dow Jones Industrial Average were up less than 0.1%.

On Friday, the S&P 500 index fell 0.4% and the Dow slipped less than 0.1%. The Nasdaq composite slid 1%. In Asia on Monday, the Shanghai Composite Index advanced 0.4% to 3,593.52 and the Hang Seng in Hong Kong gained 1.1% to 23,746.54. The Kospi in Seoul fell 1% to 2,926.72 and Sydney's S&P ASX 200 lost 0.1% to 7,447.10. India's Sensex rose 0.9% to 60,256.15. New Zealand and Jakarta declined. Bangkok and Singapore advanced.

Investors were cautious after Fed officials said in December that plans to roll back ultra-low rates and other economic stimulus that has boosted share prices might be accelerated to cool US inflation now at a four-decade high.

Investors are pricing a better than 79% probability that the Fed will raise short-term rates in March. A month ago, they saw less than 39% of a chance of that, according to CME Group.

Record-low interest rates have helped to boost stock prices despite bouts of unease about the coronavirus pandemic.

The Fed already has slowed bond purchases that were pumping money into the financial system to push down commercial lending rates. Notes from its December meeting indicated Fed officials might to cut off such purchases more quickly than previously planned.

With inputs from PTI

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