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Emerging market must prepare for US rate hike impact


03-18-2015 17:38 BJT

The world's emerging economies should brace for the impact from a possible U.S. rate hike. That was the word from IMF chief Christine Lagarde during a meeting in India on Tuesday.

"As economic conditions improve in at least some advanced economies, portfolio rebalancing out of the emerging market economies can be expected and some volatility cannot be ruled out. So, emerging markets need to prepare for that volatility, risk and this uncertainty."

"The danger is that vulnerabilities that build up during a period of very accommodative monetary policy just as quickly as it built up can unwind suddenly when such policy is reversed, creating as a result significant market volatility," she said.

Lagarde warned there could be a repeat of the so-called "taper tantrum" that was seen in 2013 when then-Fed chair Ben Bernanke sent investors running by merely mentioning the possibility of less Fed liquidity support.

Lagarde says advanced economies could help reduce the risk of market volatility by communicating their policy intentions clearly. But she added that emerging markets that have already gone through economic volatility would deal with the shockwaves better.

Lagarde also said central banks should stand ready to act, with both liquidity support and targeted foreign exchange interventions.

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