Emerging Markets to be Hit with Turmoil if Rates Increase

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Kaushik Basu, the chief economist for the World Bank is warning that a raise in borrowing rates later this month by the Federal Reserve could put emerging markets into a state of panic and turmoil.

Warning Bells

While the economy has been growing slowly but steadily since the recession in 2009, there have been some major global upsets in the past several months, causing warnings to be issued from various sides to the U.S. Federal Reserve, cautioning it to stay the hike until the economy is more stable. Many fear that the world economy is currently in such an insecure position, that a move from the U.S. to raise the rates before more stability is achieved, could seriously affect emerging economies.

Capital Outflows

If the Federal Reserve increases the borrowing rates during its meeting next week, the immediate result could be a lot of so called “fear capital” leaving the emerging market nations, causing major swings in their currencies. Such an outflow of capital from emerging economies and into assets that are dollar-denominated would create turmoil, increase uncertainty which could lead to civil unrest and hurt economic growth globally.

Basu’s warning about the possible results of a premature hike came only a few days after Christine Lagarde, the head of the International Monetary Fund, advised the Fed not to rush its decision to raise the rates. She warned the Fed should only make the move if it is certain that the decision would not need to be reversed further down the line.

The issue was thoroughly discussed among the finance ministers and central bankers of the G20, the world’s 20 biggest economies, in a recent meeting held in Ankara. Legard specified that the position of the IMF is such that the Fed should be absolutely certain about the data, both on the front of stability and on the effect on employment and overall growth before it finally commits to the move.

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