28 October 2016
The Federal Reserve is widely expected to raise benchmark rates at its mid-December policy meeting. Photo: Reuters
The Federal Reserve is widely expected to raise benchmark rates at its mid-December policy meeting. Photo: Reuters

BIS sees big blow to emerging markets from US rate hike

An eventual US rate hike will have negative fallout on emerging markets despite calm in global stock markets in the fourth quarter.

“The calm has been uneasy,” said Claudio Borio head of the economics department of the Bank for Internal Settlements (BIS).

“Very much in evidence, once more, has been the perennial contrast between the hectic rhythm of markets and the slow motion of the deeper economic forces that really matter.”

The Wall Street Journal is citing a BIS quarterly review in which the Switzerland-based consortium of central banks noted that emerging markets settled down after a turbulent summer when volatility in China’s stock market and currency upended financial markets.

“The short-lived market response might suggest that [emerging markets] could ride out the prospect of US monetary tightening,” BIS said, referring to financial market trends in emerging markets since mid-November.

“However, less favorable financial market conditions, combined with a weaker macroeconomic outlook and increased sensitivity to US interest rates, heighten the risk of negative spillovers to [emerging markets] once US rates do start to rise.”

Borio said the outlook over the short term for key emerging market economies was little changed recently despite the greater calm that prevailed in markets.

Brazil and Russia still confronted deep recessions and China’s economic outlook showed few signs of improving, he said.

Although international lending to China rose modestly during the second quarter from the first, “international bank lending to China has lost significant momentum and contracted by 3 percent in the year to end-June 2015”, BIS said in its report.

The US Federal Reserve is widely expected to raise interest rates at its mid-December meeting after keeping its key policy rate pinned near zero for the past seven years.

A robust rise in November employment further cemented those expectations.

“On the one hand, higher rates would be positive as they would confirm the strength of the US recovery.

But higher rates would inter alia increase interest expenses for corporates,” the BIS report said.

In contrast, the European Central Bank beefed up its stimulus efforts at its Dec. 3 meeting, although a reduction in its already negative deposit rate, and six-month extension of its bond buying program, was less than financial markets had hoped for.

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