The World Bank has issued a new report warning developing nations to prepare for possible financial calamity when the U.S. Federal Reserve raises interest rates. The raise in the interest rates could come by Thursday after the Fed wraps up a policy meeting.
Although the World Bank states that risk is minor for developing countries, the report warns that the risk for negative financial impact could be much worse. The Bank says that if there is significant disruption to capital flow into developing countries, there could be slow economic growth and financial instability.
The BBC writes:
“The new World Bank report gives a number of reasons why developing nations should be able to cope without a great deal of fallout. Notably, the rate rise has been anticipated for a long time and it is likely to be a gradual process. Rates will not be raised rapidly.”
Still, the report warns of a “perfect storm” leading to negative economic impacts for developing countries. The World Bank states:
“Financial conditions are on the cusp of becoming more challenging for merging and frontier market economies as the Fed will soon embark on its first tightening cycle in almost a decade. This will take place in a difficult global context for emerging and frontier market economies: global growth remains subdued, world trade is weak, and commodity prices remain low. Moreover, many emerging and frontier market economies are struggling with weakening growth prospects and lingering vulnerabilities that constrain their policy options.”
The World Bank concludes their report with a stark warning to developing economies, stating that they “may hope for the best during the upcoming tightening
cycle,” but “given the substantial risks involved, they need to prepare for the worst.”
What are your thoughts on the Federal Reserve? Should the Fed raise interest rates?