Emerging market central banks will be under pressure to hike rates as the Federal Reserve maintained US rates at a two-decade high at its sixth consecutive meeting yesterday, Nigel Green, chief executive and founder of DeVere Group, warned.
Following the meeting, the federal open market committee held the range for its benchmark at 5.25 per cent to 5.5 per cent.
Green said: “The Fed is expected to hold rates at the two-decade high that was first implemented last July, and markets are increasingly pessimistic about the likelihood of rate cuts this year.
“This puts the squeeze on emerging market central banks, including countries like South Africa, India and Mexico, to hike their own rates in order to address currency depreciation, inflationary pressures, capital flight risks, and external debt servicing concerns.”
Should policymakers move to raise rates in emerging economies, global investors could be impacted, Green said.
He added: “Higher interest rates in emerging markets can lead to higher yields on government bonds issued by these countries. This is likely to attract foreign investors seeking higher returns, resulting in increased demand for emerging market bonds.
“In turn, higher yields may also lead to capital outflows from developed markets as investors reallocate their portfolios to take advantage of better returns in emerging market bonds.”
Green warned that equity and currency markets could also be affected.
ima.jacksonobot@ft.com
