[Asia Economy Reporter Kim Hyemin] The International Monetary Fund (IMF) has urged emerging markets to swiftly prepare for early monetary tightening by the U.S. Federal Reserve (Fed).
On the 10th, the IMF pointed out in a blog post that if widespread wage increases and persistent supply bottlenecks occur in the U.S., inflation could rise faster than expected, fueling interest rate hikes.
Last week, the Fed hinted at early rate hikes and balance sheet reduction through the minutes of the December Federal Open Market Committee (FOMC) meeting.
The IMF forecasted that if monetary tightening is carried out gradually in line with the economic recovery and is pre-announced to the market, it could be positive for emerging markets. However, it also warned that a slowdown in U.S. demand and reduced trade could lead to capital outflows and currency depreciation in emerging markets.
The IMF advised, "Emerging countries should prepare for potential economic volatility," adding, "Some emerging markets are already adjusting their monetary and fiscal policies, but policy responses should vary depending on their situations and vulnerabilities." It further noted that in any case, depreciation of currencies and rising benchmark interest rates should be tolerated.
For countries with large foreign currency debt, the IMF recommended reducing debt maturity mismatches and, if possible, implementing currency hedging. It also emphasized the need to maintain financial stability by carefully adjusting ongoing fiscal support policies for companies in line with economic outlooks.
Meanwhile, regarding the global economy, the IMF expects the recovery to continue this year and next, but the risk of growth slowing due to a resurgence of COVID-19 remains high.
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