Rising US Interest Rates Could Hit Vulnerable Countries, IMF Warns | International Monetary Fund (IMF)

Higher inflation in the United States could lead to a harsher-than-expected response from the US central bank, causing jolts in financial markets and endangering vulnerable countries, the International Monetary Fund has warned.

Adding to growing concerns about the sharp increase in price pressures recorded across the world, the IMF said emerging countries should brace themselves for strong action from the US central bank, the Federal Reserve.

“For most of the past year, investors have taken into account a temporary rise in inflation in the United States given the unstable economic recovery and the slow resolution of supply bottlenecks,” the Washington-based IMF said in a blog post.

“Now the feeling has changed. Prices are rising at the fastest rate in nearly four decades and the tight labor market has started to trickle down to wage increases. The new Omicron variant has raised additional concerns about the supply side pressures on inflation. The Federal Reserve referred to the development of inflation as a key factor in its decision last month to accelerate the reduction in asset purchases. “

With the headline measure of inflation above 6% and at its highest level in nearly four decades, financial markets believe the Fed will hike interest rates four times in 2022 and also sell bonds in the part of a process known as quantitative tightening.

Higher borrowing costs in the United States would normally lead to a stronger dollar, making it more expensive for emerging countries that have borrowed heavily in the currency to service their debts. The slowdown in US growth caused by higher interest rates would also affect exports to the world’s largest economy.

The IMF said it expects inflation in the United States to decline later in the year, but has pointed to the possibility that widespread wage increases or sustained supply bottlenecks could cause a rising prices and fueling expectations of further upward pressure on the cost of living.

“Faster rate hikes by the Fed in response could shake financial markets and tighten financial conditions globally,” the IMF said. “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.”

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The prospect of rising U.S. interest rates has driven stock prices down since early 2022.

Jim Reid, analyst at Deutsche Bank, said: “To be fair, the Fed was starting to catch up with reality late last year, but Omicron meant the market was reluctant to view their more hawkish move as anything. realistic fact, given the risks that the variant presented.

“However, the holiday season provided more evidence that Omicron was significantly milder, especially among the vaccinated, and the result was that the market looked at this more than it was willing to do before Christmas. while at the same time the Fed has become even more hawkish by increasing its stake on quantitative tightening, so a perfect storm.

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Stephen V. Lee