Daily Management Review

Do Not Hike Interest Rates Yet: IMF to G20 Countries


Do Not Hike Interest Rates Yet: IMF to G20 Countries
Citing the presence of too many risks to global growth, the International Monetary Fund warned the world's biggest economies against raising interest rates too soon. The Fund suggested "growth supportive policies" to be pursued by advanced economies.
The warning was delivered by the world finance body in a letter to the central bankers and finance ministers of the G-20 group of leading economies, who are meeting in Turkey this week. The already fragile economic recovery following the 2008-09 financial crisis can be damaged by higher rates, the fund said.

“Monetary policy must stay accommodative to prevent real interest rates from rising prematurely,” the IMF said. This simply translates to saying that the central banks should look to raising of interest rates later than sooner.
Interest rates were kept at record lows as was expected by the market by the European Central Bank when it met on Thursday.

In the last one month, the global economy has been tormented by slowdown in emerging markets, lower demand from China, weak commodities prices and a sluggish recovery in the world's most advanced economies.
IMF statement noted that the global economic growth in the first year of 2015 was lower than the last half of 2014.
While an interest rate hike by the S. Federal Reserve was being anticipated by almost all market experts, many are now of the opinion that the stock market crash in China and the overall market volatility would force postponement of the anticipated September rate hike by the central bank of the US. The final call by the US Federal Reserve would probably be taken after the data for the latest US job report becomes available. The Federal Reserve has not raised interest rates in the US for nearly a decade now. The IMF had in June, advised the US Federal Bank to wait till 2016 to decide on rate hike.
Meanwhile, Christine Lagarde, managing director of IMF, warned that the world economies should get prepared for a slowdown in the Chinese economy. However the IMF also noted that the slowdown would not be a sharp or a protracted one.
“As the Chinese economy is adjusting to a new growth model, growth is slowing -- but not sharply, and not unexpectedly. Other emerging economies, including Indonesia, need to be vigilant to handle potential spillovers from China's slowdown and tightening of global financial conditions," Lagarde said had on Tuesday in Indonesia.
The pace of the Chinese economy, which had grown at 10% for most part of the last decade is expected to enter a phase of stunted growth. This has resulted in China not importing as many commodities as it used to. The recent devaluation of the yuan followed by a historic rout at the country’s stock market had created ripples across the world economies.  
“While Asia as a region is still expected to drive global growth, even here, the pace is turning out slower than expected. Overall, we expect global growth to remain moderate and likely weaker than we anticipated last July," Lagarde said.