“The authorities may have to activate multiple instruments of politics, depending on the actions taken by the Federal Reserve and the situation in their own countries “, maintains the last warning from the International Monetary Fund (IMF) to emerging countries on the impact of the rate hike due to inflation and the micron variant.
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So they hold it Stephan Danninger, Kenneth Kang, and Hlne Poirson on the IMF blog, where they point out that the new micron variant has generated more concerns about pressure from the supply side affecting inflation. “The Federal Reserve has indicated that the evolution of inflation is a key factor in its decision last month to curb asset purchases sooner,” they add.
The impact of inflation in the United States
For most of the past year, investors made numbers considering a temporary rise in inflation in the United States in light of the faltering recovery and slow resolution of supply bottlenecks.
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The attitude now is different according to the Fund’s economists. “Prices are rising at the fastest rate on record in nearly four decades, and labor supply shortage is raising wages“, to which micron and the Fed’s decisions add.
Emerging countries are also facing high inflation and considerably higher levels of public debt, pre-existing scenarios for Argentina before the pandemic..
The impact as it reaches neighbors such as Brazil and partners such as Russia and South Africa. “Average gross public debt in emerging markets has increased by almost 10 percentage points since 2019, with an estimated 64% of GDP by the end of 2021, with marked variations from one country to another,” the Fund remarked.
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New risks to recovery
Still, solid growth is anticipated in the United States. Inflation probably will moderate more later in the year, as supply shocks dissipate and that the fiscal contraction slows down demand.
If policy rates rise and inflation moderates as expected, history shows that the effects for emerging markets will tend to be mild if the monetary contraction is gradual, it is properly communicated and occurs in response to an entrenchment of recovery.
stronger impact on emerging
“Anyway, it is still possible for emerging market currencies to depreciate, but external demand will offset the effect of the increase in financing costs “, add the economists.
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And they warn that the repercussions in emerging markets could also be less benign. “Generalized wage inflation in the United States or persistent supply bottlenecks It could raise prices more than anticipated and raise expectations of faster inflation. ”
financial nervousness and global shrinkage
The fastest rate hikes from the Federal Reserve could cause nervousness in financial markets and a contraction in global financial conditions in accordance with the Fund.
“This could be compounded by a slowdown in demand and trade in the United States, which could trigger capital outflows and currency depreciations in emerging markets,” the IMF said about the impact that could complicate Argentina -which will not be affected by capital controls- due to its effect in the region and globally.
“The repercussions of the tightening of the Federal Reserve’s policy could be more severe in vulnerable countries,” the agency warns in this regard.
In recent months, emerging markets with high levels of public and private debt, foreign currency exposures and lower current account balances they have already registered steeper fluctuations of your currencies relative to the US dollar.
This combination of slower growth and higher vulnerabilities could lead to a negative loop of interactions for those economies, as the IMF noted in the October editions of the World Economic Outlook (WEO report) and the World Financial Stability Report ( GFSR report).
“Although the global recovery is projected to continue this year and next, risks to growth remain high due to persistent outbreaks of the pandemic. There is a risk that this coincides with the faster tightening of Federal Reserve policy, and for this reason emerging economies must be prepared for possible episodes of economic turbulence “, the economists agreed.