IMF warns developing countries of risks associated with Fed rate hike

by time news

The International Monetary Fund (IMF) has warned emerging economies, including Russia, that they may face depreciation of their national currencies due to the tightening of the policy of the US Federal Reserve System (FRS). This is stated in a message on the website of the fund, published on January 10.

From the minutes of the December meeting of the FRS, released last week, it follows that the regulator is considering the possibility of raising the rate earlier or faster than planned. In December, the Fed announced that it would hike its key rate three times in 2022.

If the rate is nevertheless raised in response to rising inflation in the United States, this could lead to turmoil in the financial markets, the IMF experts noted. “This development could be accompanied by a slowdown in demand and trade growth in the United States and could cause capital outflows and depreciation of currencies in developing countries,” they warned.

“Although the cost of dollar loans for many remains low, concerns about domestic inflation and stable external financing have led several developing countries, including Brazil, Russia and South Africa, to raise interest rates last year,” they recalled in IMF.

Despite the projected continuation of the global economic recovery in 2022 and 2023, emerging economies continue to struggle with the ongoing pandemic. Given the fact that such a situation may be superimposed on a more rapid tightening of the Fed’s policy, they should prepare for “economic turbulence”, experts of the fund say.

The Bank of Russia has raised the key rate seven times since March last year. In December, it was immediately raised by 1 percentage point, to 8.5%. This is the highest level since October 2017. The main reason for the increase was that the annual inflation in Russia was higher than the October forecast of the Central Bank. At the same time, the Central Bank admits the possibility of further rate hikes at the next meetings.

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