IMF chief warns of US rate hike dangers
Emerging markets are the most vulnerable
EMERGING markets needed to prepare for capital flight if investors were surprised by the timing or pace of policy changes in developed economies, the International Monetary Fund’s (IMF) managing director, Christine Lagarde, said a day before the US was expected to signal a shift in stance.
“We are perhaps approaching the point where, for the first time since 2006, the US will raise short-term interest rates later this year,” Lagarde said in Mumbai yesterday. “Even if this process is well managed, the likely volatility in financial markets could give rise to potential stability risks.”
She was sharing the stage with Reserve Bank of India governor Raghuram Rajan, who had repeatedly called for more co-ordination among central banks to shield vulnerable markets from capital swings.
The rupee was among currencies that plunged to a record when the Fed first signalled a reduction in stimulus in May to June 2013, pushing India to the brink of a crisis.
Almost 90 percent of economists surveyed predicted chairwoman Janet Yellen would drop a pledge to remain “patient” about raising rates when the Fed released its statement after a meeting that ends today.
The omission would signal that, starting in June and for the first time since 2008, officials would be making rate decisions meeting-by-meeting, based purely on the data in front of them, rather than committing themselves to keeping borrowing costs low.
Overseas investors withdrew $8 billion (R99bn) from rupee-denominated debt in 2013 in what came to be termed a “taper tantrum”, compelling Rajan to offer banks discounted swops for their dollars.
Since then, he has built up the nation’s foreign exchange reserves to a record $338bn.
“I am afraid this may not be a one-off episode,” Lagarde said of the 2013 outflows.
Apart from urging emerging markets to prepare for swings, she called on developed economies to use “clear and effective communication”. – Bloomberg