World Bank ad­vises de­lay of US Fed in­ter­est rate rise

The China Post - - BUSINESS INDEX & - BY PAUL HAN­D­LEY

The World Bank warned emerg­ing economies around the world Wed­nes­day of a rocky road ahead as the U.S. moves to­ward tight­en­ing mon­e­tary pol­icy and the dollar strength­ens.

But the devel­op­ment lender’s chief econ­o­mist also urged the U.S. Fed­eral Re­serve to put off any rate hikes un­til next year so as to give more breath­ing room to the slow-grow­ing global econ­omy.

In an up­date of the prospects for world growth, the World Bank trimmed its fore­cast for 2015 to 2.8 per­cent, com­pared to the 3.0-per­cent ex­pan­sion pre­dicted in Jan­uary.

That down­grade was due mainly to the U.S. con­trac­tion in the first quar­ter, slow turn­arounds in Europe and Ja­pan and China’s de­cel­er­a­tion.

But it has in­creased the chal­lenges for emerg­ing and poor economies, many hit by low com­mod­ity prices and cap­i­tal out­flows.

And though the plunge in oil prices has low­ered costs for net en­ergy im­porters, be­cause of the stronger dollar the benefits of cheaper oil have not reg­is­tered deeply on their economies, ac­cord­ing to the World Bank re­port.

Th­ese chal­lenges could be­come tougher as the U.S. econ­omy re­bounds and the Fed mulls rais­ing in­ter­est rates, it said.

As that hap­pens, there will be more volatil­ity in global mar­kets and weaker economies will suf­fer, the re­port said.

Those economies will pay more to bor­row and in­com­ing in­vest­ment will be harder to at­tract, ef­fec­tively adding more down­ward pres­sure on cur­ren­cies that have al­ready fallen sig­nif­i­cantly against the dollar over the past year.

“We are ad­vis­ing na­tions, es­pe­cially emerg­ing economies, to fas­ten seat belts,” said Kaushik Basu, the World Bank econ­o­mist.

Basu took the view of his coun­ter­parts at the In­ter­na­tional Mon­e­tary Fund that the U.S. and global econ­omy would be bet­ter off if the Fed holds its bench­mark fed­eral funds rate at the zero level un­til early next year.

“If I were ad­vis­ing the U.S. Fed, I would rec­om­mend that this hap­pens next year in­stead of late this year,” he said.

The Bank was rel­a­tively op­ti­mistic be­yond 2015, stick­ing to its fore­cast for 3.3 per­cent world growth in 2016.

For this year, it cut its fore­cast for the United States by a half­per­cent­age point to 2.0 per­cent; raised its out­look for the euro to 1.5 per­cent; trimmed Ja­pan to 1.1 per­cent and held its China view sta­ble at 7.1 per­cent.

The South Asia re­gion got a 1.0 per­cent­age point up­grade to 7.1 per­cent, but for de­vel­op­ing coun­tries as a whole, the out­look was cut by 0.4 per­cent of a point to 4.4 per­cent.

The prospect of greater mar­ket volatil­ity and higher fi­nanc­ing costs re­quires vul­ner­a­ble coun­tries to strengthen their fi­nances, di­ver­sify from de­pen­dence on com­modi­ties and build their com­pet­i­tive­ness and ef­fi­ciency through re­forms, the Bank said.

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