IMF warns developing countries of “economic turmoil” ahead of Fed rate hikes, Omicron
WASHINGTON (AFP) – Emerging economies should prepare for possible hard times as the US Federal Reserve prepares to raise interest rates and global economic growth slows due to the Omicron variant of Covid-19, the IMF warned on Monday January 10.
The International Monetary Fund, which is due to release updated economic forecasts on Jan. 25, said for now, the global economic recovery from the ravages of the pandemic is expected to continue this year and next.
But “the risks to growth remain high due to the stubborn resurgence of the pandemic,” IMF economists Stephan Danninger, Kenneth Kang and Helene Poirson wrote in a blog post.
The highly contagious Omicron strain has spread like wildfire around the world since mid-December, causing a record number of new cases of Covid in the latest wave of the global health crisis.
Omicron, which appears to cause less severe disease than previous strains of the coronavirus, is forcing countries to reinstate health measures that are hampering economic growth.
“Given the risk of this coinciding with faster Fed tightening, emerging economies should prepare for possible economic crises,” economists said, as these countries also face high inflation and debt. considerably higher public.
The Fed has indicated that it will raise key interest rates sooner and more aggressively than expected, in order to counter the rampant inflation in the United States which is hitting American households and consumption – the engine. of economic growth in America.
Higher interest rates mean that the costs of financing some emerging economies with debt denominated in dollars will increase.
These countries are already lagging behind in the global economic recovery and therefore less able to absorb additional spending.
“While dollar borrowing costs remain low for many, concerns over domestic inflation and the stability of foreign funding drove several emerging markets over the past year, including Brazil, Russia and South Africa , to start raising interest rates, “the IMF said.
More rapid Fed rate hikes could shake financial markets and tighten financial conditions globally, according to the blog.
The risk is that there will be a slowdown in demand and trade in the United States, as well as capital flight and a depreciation of the dollar in emerging markets.
The IMF recommended that emerging countries “adapt their response according to their situation and their vulnerabilities”.
And central banks that raise interest rates to fight inflation should engage in “clear and consistent communication” so people better understand the need for price stability, the international lender said.