According to a report by the World Bank, the interest rate hikes by the US Federal Reserve to combat inflation could have global economic consequences.
The World Bank warns that the rapid tightening of monetary policy is having a particularly negative impact on emerging and developing countries.
The Fed will next discuss US interest rates on Wednesday. Markets are largely expecting the US Federal Reserve to pause interest rates after ten consecutive rate hikes.
The attempt of US-Notenbank Fedinflation due rate hikes lowering has not yet triggered a recession in the US itself. However, the tough tightening of monetary policy could have significant economic consequences worldwide. In any case, they warn of that World Bank in a new report.
The World Bank’s warning comes days ahead of the Fed’s next rate decision. The US Federal Reserve is advising this Wednesday. The markets are largely expecting the Fed to pause interest rates for the first time in more than a year.
The central bank has it policy rates since spring 2022 increased ten times in a row. Inflation in the US, while declining, is still well above the 2% target. In May, the US Federal Reserve raised interest rates by 0.25 percentage points to a target range of 5 to 5.25 percent. These are the highest interest rates in 16 years.
According to that Message the World Bank on the global economic outlook the rapid tightening of monetary policy in the USA is particularly affecting emerging and developing countries and could lead to financial crises and recessions worldwide.
The Fed’s rate hikes may spill over into emerging markets. This could lead to higher domestic interest rates or a devaluation of their currencies, which in turn would exacerbate inflation. This could make it much more difficult for companies and governments in these countries to borrow money and access capital, for example to finance investments.
World Bank: Fed rate hikes are worrying for poorer countries
The World Bank certifies that the global economy as a whole is in a “precarious state”. One reason is that rising interest rates are slowing down both consumption and corporate investment. Global economic growth will weaken from 3.1 percent to 2.1 percent this year.
“With the rise in US interest rates being mainly driven by inflation and reaction shocks, the outlook for emerging and developing economies is worrying,” the authors write. Emerging economies are particularly vulnerable to interest rate fluctuations and market adjustments. According to the report, many of these countries are highly indebted and therefore at high risk of getting into trouble from higher interest rates.
In addition to interest rate hikes, turbulence in the financial system following several bank failures this spring could also pose a threat to the emerging markets. As a result of tensions in the US banking sector, emerging markets could face a drop in exports and financial market disruption, weighing on their growth prospects.
The World Bank suggests that central banks in developed countries “communicate their intentions as clearly as possible and balance their strategies to avoid abrupt changes in the outlook”. Politicians should ensure that international financial institutions such as the World Bank or the International Monetary Fund receive adequate funding to support countries in need.
The article first appeared on Business Insider in the US with the title: The Fed’s fight against inflation hasn’t caused a recession in the US yet, but it could lead to a global downturn. You can read the original here.