Xinhua – As US inflation, announced on Wednesday, hit an annual rate of 8.3 percent in April, the second straight month with inflation over 8 percent, market fears mounted over the Federal Reserve’s further tightening measures and the widespread headwinds they may possibly trigger across the world.
Adverse spillovers from the Fed’s latest sizeable interest rate hike are rippling out to many economies, unleashing more volatility in the global financial markets and overshadowing the post-pandemic recovery amid rising recession concerns. By raising its benchmark rate by half a percentage point, the U.S. central bank has made an abrupt U-turn from its easy monetary policies, adopted since the COVID-19 pandemic, to a more aggressive tightening mode.
The sharpest rate hike in over 20 years, aimed at quelling America’s highest inflation in 40-plus years, has nevertheless aggravated the debt burden and currency depreciation pressure of other world economies.
Besides, the Fed also announced plans to scale back its holdings of government bonds and mortgage-backed securities by 47.5 billion U.S. dollars per month on its 9 trillion-dollar balance sheet since June. The move has prompted central bankers of many other countries to speed up their shift away from easy money. Analysts caution that such a trend will further lift borrowing costs and risk drying up liquidity worldwide.
Analysts warn that significant changes in U.S. monetary policies will make it more expensive for emerging markets that borrow in dollars to pay their debt and stand to undermine investor confidence in those countries. This can possibly trigger capital flight that would directly impact their exchange rates.
The Fed’s bold move could tighten financial conditions globally and lead to capital outflows and currency depreciation in emerging markets, and the ensuing inflationary pressure is “very disruptive,” explained Ehab al-Desouki, head of the Economy Department of Cairo-based Sadat Academy.
The viewpoint was echoed by Argentine economist Jorge Marchini, who believes the Fed’s sharp rate hike could deal a blow to low-income countries and developing economies, particularly Latin American countries that have taken on a large quantities of debt due to the pandemic.
The impact is “enormous” especially for Argentina, the largest debtor to the IMF. “A rising interest rate obviously means a bigger (debt) burden,” as Argentina’s internal and external commitments are managed through variable rates set by the Fed rate, he added.
What’s more, the Fed rate increase could strain ties between developing and lower-income countries in Latin America that struggle with their balance of payments, by sparking “a competition to devalue the currency,” the economist warned.
Take Brazil as an example. “When the U.S. increased interest rates, much more capital will move from Brazil to the U.S., which will depreciate Brazilian currency,” said Hsia Hua Sheng, associate professor of finance at Getulio Vargas Foundation’s Sao Paulo School of Business Administration (FGV-EAESP). “To fight the inflation effect, probably the Brazilian central bank will make its interest rate higher than expected.”
Advanced economies are also under growing strain due to Fed’s policy shift, which, by pushing up the value of the dollar, will widen the gap between the dollar and other currencies, and also push up commodity prices denominated in the dollar, thus stoking volatility in the financial and foreign exchange markets worldwide.
Nomura Research Institute researcher Takahide Kiuchi said the accelerated US interest rate is the biggest reason for the yen’s weakness. As the yen-dollar gap has widened, the trend of Japanese households reallocating their
financial assets and selling the yen has caught the attention of the market.
This article was first published in Khmer Times. All contents and images are copyright to their respective owners and sources.
