Interest rate hike could harm global economy - IMF

By MoneyTimes

Sep 05, 2015 03:32 AM EDT

The International Monetary Fund raises concern about the potential fallout of a US rate hike this year.

The fund says raising interest rates at this time puts the already fragile global economy at risk. "Monetary policy must stay accommodative to prevent real interest rates from rising prematurely," the IMF said Wednesday in a letter to top central bankers and finance ministers meeting in Turkey this week.

Higher rates in the US could lead to a stronger dollar as well as capital flights from emerging markets into the world's biggest economy, shaking up financial markets.

Instead, the IMF advises advanced countries to pursue growth-friendly tax and spending programs. Certain emerging economies should boost exports by allowing their currencies to fall.

Following that advice, the European Central Bank decided to keep interest rates at record lows.

Later this month, the US Federal Reserve is holding a key policy meeting, and there is a possibility it would raise short-term interest rates during the gathering to rein in inflation.

But IMF Managing Director Christine Lagarde said it would be best if the Fed could delay the rate hike to 2016, noting that the benefits of such a move outweigh the cost of allowing inflation to rise. Lagarde made that statement in June.

Apart from inflation, the Fed is taking into account several other factors in deciding whether to raise rates, which have been near zero since the 2008 financial crisis. Among them the volatility in financial markets as well as China's economic woes that have brought down oil and copper prices and hit hard countries exporting the commodities.

Last month, China unexpectedly devalued its currency, the yuan, further weakening the local stock market that had been falling since June. While Beijing said it was only responding to claims the yuan was overvalued, many saw the currency devaluation as an attempt to give its exporters a competitive edge. Speaking to CNBC, US Treasury Secretary Jacob Lew said China would be held accountable for currency manipulation.

The IMF says the problems triggered by the China slowdown could weaken global growth.

Despite that, the fund still forecasts a 3.3% growth in the global economy this year, little-changed from 3.4% in 2014.

For the US economy, it sees a 2.5% growth this year, slightly higher than 2.4% in 2014. China is expected to expand 6.8%, down from 7.4%.

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