WASHINGTON, D.C.: The International Monetary Fund (IMF) voiced concern on Wednesday (Thursday in Manila) about the global economy, weakened by China’s slowdown and facing a potential “vicious cycle” from a looming US interest rate hike.
“On the economic front, there is . . . reason to be concerned. The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility,” IMF Managing Director Christine Lagarde said in a speech in Washington, according to the prepared text.
Lagarde also pointed to the “sharp deceleration” in the growth of global trade and the “rapid drop” in commodity prices, which is hammering the finances of commodity-exporting emerging market economies.
Many of the recent economic gains in Africa, Latin America and Asia “now seem in jeopardy,” said Lagarde, addressing the Council of the Americas ahead of next week’s IMF and World Bank annual meetings to be held in Lima, Peru.
The IMF chief said that the Fund’s World Economic Outlook report, to be published Tuesday, would project weaker growth this year than in 2014 and only a slight pick up in 2016.
In her speech, Lagarde emphasized the Fund’s concern about the Federal Reserve plan to raise its benchmark interest rate, held at zero since late 2008 to support the US economy’s recovery from the Great Recession.
The rate rise, still on the Fed’s radar for this year, could drive investors to pull funds from emerging countries into the United States and further strengthen the strong dollar, the currency on which the debt of many companies is based.
“Rising US interest rates and a stronger dollar could reveal currency mismatches, leading to corporate defaults—and a vicious cycle between corporates, banks, and sovereigns,” Lagarde said.
The IMF has repeatedly called for the Fed to wait until 2016 to increase its key rate for the first time in more than nine years.
Fed Chair Janet Yellen, as recently as last week, said the hike would likely come before year’s end.
Analysts are increasingly forecasting the Fed will bypass the October monetary policy meeting to make the move at the mid-December meeting.
Lagarde, in an interview with the CNBC television network, expressed support for Yellen’s stance that a rate hike would be data-dependent.
“We don’t see much movement on the inflation front, nor on the wages front,” Lagarde said. “If the data are not telling that story of inflation rising a bit by December, then why do it in December?”