A rise in market expectations for US interest rates as the Federal Reserve starts to normalize policy could cut capital inflows to emerging markets by as much as 45%, World Bank economists said in a paper published on Tuesday.
The Fed has left the door open to a modest rate rise on Thursday, although economists and investors are divided over whether policymakers will act now or later in the year, Reuters reported.
The World Bank paper said although most expected a smooth tightening cycle from the Fed, there was a risk of a substantial hit to capital flows if investors started to expect more aggressive hikes and drove up long-term bond yields.
A 1 percentage point rise in US, eurozone, UK and Japanese yields could cut capital inflows to emerging and frontier economies by 45% within a year, representing up to 2.2 percentage points of their combined economic output.
“Emerging and frontier market economies may hope for the best during the upcoming tightening cycle, but given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy,” said Carlos Arteta, one of the paper’s authors.
Final Countdown
There is no consensus among economists regarding when the Federal Reserve will raise interest rates.
Some believe it’ll happen on Thursday when the Fed concludes its next Federal Open Market Committee meeting. Some believe it’ll happen in October. Others believe it will happen in December. And then there’s the very few who think we will have to wait until 2016 to see a move.
One thing is clear: no one has a very high conviction or a particularly convincing case for their call.
