Fed’s 1st rate hike in nearly one decade clouds emerging nations
Print Edition
AN expected first interest rate hike in almost a decade by the Federal Reserve tomorrow could squeeze emerging economies’ room for manoeuvre as they try to stave off recession, analysts warn.
The rise would mark “the end of a very big illusion,” says Christine Rifflart, economist with French think tank OFCE.
Emerging economies have done well out of the Fed’s latter-day generous monetary policy but with the cycle seemingly about to turn, many of them, already battling pallid growth, face further headwinds.
Many emerging states are large-scale producers of raw materials and have ridden the boom of Chinese demand. With that having fallen off, growth has taken a hit.
Worse still, rising rates will penalize their debt financing conditions and push down their currencies, hitting export earnings.
Developing nations’ central banks are pinning their hopes on a moderate rise to ensure the Fed does not make their task of keeping their own situation on an even keel insurmountable.
A US rate rise risks increased capital outflow in emerging states who could respond by raising their own, in many cases already high, rates.
“If they want to retain a certain currency stability the emerging countries will have to raise their rates. Yet, as they are caught in an economic slowdown or even recession in some cases, they really ought to do the opposite,” says Olivier Garnier, chief economist with Societe Generale.
Brazil is a notable example with inflation in double figures and rates already sky high at 14.25 percent, leaving little margin for more upward movement.
“US monetary policy poses each time a problem in Brazil. Its economy is in recession and it should loosen monetary policy but that only reinforces capital outflows, a drop in currency value and hence inflation,” Garnier said.
But Capital Economics research credits emerging nations with more resilience, saying yesterday that they are “well placed to withstand Fed tightening” as previous evidence suggested “the onset of higher interest rates in the US does not necessarily trigger a rush to the exits.”
The consultancy added that the impending rise comes against a largely favorable economic backdrop and has been priced in by traders.
Oil producing nations, hit by the price of crude falling to seven-year lows, likewise have to deal with the fallout of a US rate rise and accompanying dollar rise.
“The Gulf states, whose money is linked to the greenback, could find themselves saddled with an overvalued currency. To maintain their stability vis-a-vis the dollar they will in turn have to raise their own rates,” thereby losing a growth-boosting monetary tool, explains Garnier.
China may, in contrast, prove to be a special “emerging” case and fare better after any Fed decision to end the long months of rate rise rumble.
China’s own central bank on Friday indicated it believes the yuan’s value ought in future to be less dependent on the dollar and more measured against a basket of trading partner currencies.
That could help the world’s second-largest economy as it battles its own growth downturn.
“Loosening its exchange objective would give it greater scope to manage internal demand better, to cut interest rates and to try to spread credit demand on the banking market,” said Rifflart.
“That would give (China) the means to regulate its domestic demand,” she said.
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