by Chris Becker
Following calls by IMF chief Christine Lagarde over the weekend for the US Federal Reserve to reconsider raising its interest rates, the World Bank is now adding to the chorus.
From the FT:
The US Federal Reserve risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.
Rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences, Kaushik Basu told the Financial Times.Such a decision could yield a “shock” and a new crisis in emerging markets, Mr Basu told the FT, especially as it would come on the back of concerns over the health of the Chinese economy that have grown since Beijing’s move last month to devalue its currency.
He said that, even though it had been well-advertised by the Fed, any rise would lead to “fear capital” leaving emerging economies as well as to sharp swings in their currencies. The likely strengthening in the dollar would also hamper US growth, he said.
This is all very sensible advice and all the factors that would require an imminent rate rise – rising inflation, a breakout in wages, plummeting unemployment – do not exist or are marginal at best in the world’s biggest economy.
But interest rate hawks are getting flighty after being in the wilderness for nearly 10 years. Something has to give.
But it won’t be this September and possibly even this calendar year as we go into the ever ebullient Christmas consumer orgy. On the other side in 2016 might be better tactically for the first rate rise.
Whatever the case the longer term view is that of lower global growth as the BRICs, other emerging markets and Europe try to navigate out of the post-GFC environment, still engorged with mountains of public and private debt. The World Bank’s most recent forecast of 2.8% is looking more and more optimistic.