The IMF says emerging economies must be prepared for austerity measures by the central bank

A participant stands next to the IMF logo at the International Monetary Fund – World Bank Annual Meeting 2018 held in Nusa Tua, Indonesia on October 12, 2018 in Bali. REUTERS / Johannes P. Christo

WASHINGTON, Jan. 10: The International Monetary Fund has warned emerging economies should be prepared for a rise in US interest rates, as the Federal Reserve’s actions could destabilize financial markets, trigger capital outflows and currency depreciation abroad.

In a blog post on Monday, the IMF expects strong US growth to continue, with inflation expected to moderate later in the year. The global lender is about to release new global economic forecasts January 25.

The gradual tightening of US monetary policy by telegraphy may have had a small impact on emerging markets, while foreign demand offset the impact of rising financial costs.

But broad-based US wage inflation or sustained supply disruptions could push prices higher than expected and fuel expectations for rapid inflation could trigger a rapid rate hike by the US Federal Reserve.

“Emerging economies must be prepared for the potential battles of economic turmoil,” the IMF said, citing the risks posed by central bank rate hikes and re-emergence faster than expected.

St. Louis Fed President James Bullard said this week that the central bank could The interest rate should be raised in March, Months earlier than previously expected, is now “in good shape” to take even more drastic measures against inflation as needed.

“Rapid Fed rate hikes could disrupt financial markets and tighten financial conditions globally. These developments could lead to a slowdown in US demand and trade and lead to capital outflows and currency depreciation in emerging markets,” a senior IMF official wrote in a blog post.

Emerging markets with higher public and private credit, foreign exchange reserves and lower current-account balances have already seen large movements of their currencies against the US dollar.

The fund said emerging markets with strong inflationary pressures or weak firms should act quickly to raise currency depreciation and benchmark interest rates. It urged central banks to make clear and consistent their plans to tighten policies, and said countries with high levels of foreign currency debt should prevent their exposure where possible.

Governments may announce plans to increase tax resources by gradually increasing tax revenues, modifying pensions and subsidies, or other measures.

Report by Andrea Shalal; Editing Lincoln Feast.

Our standards: Thomson Reuters Trust Principles.