‘Emerging markets face risk from US Fed rate hike’

Countries that have little policy room to protect growth and buffer themselves from external shocks are likely to face more heat

The Dollar Business Bureau

  As the US Federal Reserve is likely to increase the interest rate on Wednesday for the first time since 2006, Moody’s Investors Service on Tuesday said the move may pose a threat to some emerging markets. According to analysts, the US central bank in its Federal Open Market Committee (FOMC) meeting to be held on Wednesday is expected to announce a hike of a quarter percentage points in the short-term interest rate. While the move would “confirm that the US economic expansion remains on track”, higher rates could bring “risks to some emerging market sovereigns”, said Moody's Investors Service. The direct impact of any rate increase on the US economy should be minimal as the US fund regulator is likely to increase rates only marginally and any subsequent rate increases will be gradual, Moody’s said in its report titled ‘Sovereigns – Global: Likely Fed Rate Hike Reflects Strength of US Recovery, But Exposes Some EM Sovereigns to Volatile Capital Flows.’ “A rise in the short-term interest rate target by the Federal Reserve now appears likely this Wednesday,” said Steven Hess, a Senior Vice President at Moody's. “Such a move would reinforce our view that the US economy is on track for above-trend growth.” Even though the much anticipated decision of the US Fed rules out any uncertainty, some emerging market will remain at risk to adverse capital flows and investor sentiment. “The large emerging markets that will likely be most affected are those, such as Brazil, Russia, Turkey and to some extent South Africa, where severe domestic challenges have contributed to exchange rate and financial market instability,” it said. The report did not specify whether Indian market will be affected or not, but said, countries that have little policy room to protect growth and buffer themselves from external shocks are likely to face more heat.

December 15, 2015  | 02:30pm IST

 
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