AUS
NZ
UK
CA
USA
FRA
GER
ESP
ITA
NLD
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GRC
IND
POL
BRA
ZAF
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UAE
Highlights
- Kristalina Georgieva, managing director of the IMF, recently said interest rate hikes by the Fed could have an impact on global recovery.
- She feared that escalated interest rates in the US could make repayment costlier for economies with dollar-denominated debt.
- Then followed a hawkish statement by the Fed that the US central bank members were eyeing an interest rate hike in March.
Days before US Federal Reserve policymakers announced that they would raise interest rates in March, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), had expressed concerns that interest rate hikes by the Fed could “throw cold water” on already muted economic recoveries in a few countries.
Georgieva also underlined the need for the Fed to lucidly communicate its monetary policy plans before throwing any surprise to the world. She feared that escalated interest rates in the US could make repayment costlier for economies with dollar-denominated debt.
Then followed a hawkish statement by Fed Chair Jerome Powell that the US central bank members were eyeing an interest rate hike at their March 15-16 meeting. The hawkish tone of the Fed soon triggered a sharp selloff in global equities and also sent Treasury yields flying.
Potential impact of the Fed’s rate hike on emerging markets
Emerging economies generally have higher interest rates than developed economies such as the US due to higher inflation. So, foreign portfolio investors (FPIs) borrow money at lower costs in dollar terms in the US and invest the same funds in debt of fundamentally strong emerging countries to get a higher interest rate. On this note, the impending rate hike in the US could have an impact mainly on these three lines:
- With a rise in interest rates in the US, the difference between the rates in the two countries could come down. It would make the debt of a particular developing economy less significant to an investor for the currency carry trade.
- Higher interest rates signal by the Fed points towards a future with a lower focus on growth in the US. It could be a dampener for global economies when China is struggling to cope with the real estate crisis.
- Emerging markets could also see a sharp selloff in equities amid higher returns on debt in the US. It could bring down the enthusiasm of FPIs. The currency markets could witness a fast outflow of funds.
The global debt touched US$226 trillion in 2020, the largest one-year rise since World War II, according to a statement by the IMF in December 2021.
Meanwhile, Georgieva also said that the entire problem was country-specific, and that has made 2022 even more challenging than previous year.
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