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The IMF says emerging economies must be prepared for austerity measures by the central bank

A participant stands near the IMF logo at the International Monetary Fund – World Bank Annual Meeting 2018 held in Nusa Tua, Indonesia on October 12, 2018 in Bali. REUTERS / Johannes P. Christo

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WASHINGTON, Jan. 10: The International Monetary Fund has warned emerging economies should be prepared for a rise in US interest rates, as the Federal Reserve’s actions could destabilize financial markets, trigger capital outflows and currency depreciation abroad.

In a blog post on Monday, the IMF expects strong US growth to continue, with inflation expected to moderate later in the year. The global lender is about to release new global economic forecasts January 25.

It said a gradual tightening of US monetary policy by telegraphy could have a small impact on emerging markets and offset the impact of rising foreign spending on finance.

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But broad-based US wage inflation or stable supply disruptions could push prices higher than expected, and fuel expectations for faster inflation could trigger a sharp rise in the US Federal Reserve.

The IMF said “emerging economies must be prepared for the potential fights of economic turmoil”, citing faster-than-expected central bank rate hikes and the risks of a recurring epidemic.

St. Louis Fed President James Bullard said this week that the central bank could Interest rates are set to rise in March, Months earlier than previously expected, is now “in good shape” to take even more drastic measures against inflation as needed.

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“Rapid Fed rate hikes could disrupt financial markets and tighten financial conditions globally. These developments will reduce US demand and trade and lead to capital outflows and currency depreciation in emerging markets,” a senior IMF official wrote in a blog post.

Emerging markets with higher public and private debt, foreign exchange reserves and lower current-account balances have already seen large movements of their currencies against the US dollar.

The fund said emerging markets with strong inflationary pressures or weak firms need to act quickly to curb currency depreciation and raise key interest rates. It urged central banks to state clearly and consistently plans to tighten policy, and said countries with high levels of foreign currency debt should prevent their exposure where possible.

Governments may announce plans to increase tax resources by gradually increasing tax revenues, modifying pensions and subsidies, or other measures.

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Report by Andrea Shalal; Lincoln Feast Editing.

Our standards: Thomson Reuters Trust Principles.