markets must prepare for U.S. rate hike - IMF's Lagarde
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[March 17, 2015]
MUMBAI (Reuters) - Emerging markets
must prepare for the impact of a rise in U.S. interest rates which could
surprise in both its timing and pace, the head of the International
Monetary Fund said in India on Tuesday.
In a speech in Mumbai, Managing Director Christine Lagarde warned
the so-called "taper tantrum" that slammed emerging markets in 2013
could be repeated.
At that time, then-Fed Chair Ben Bernanke sent investors running
when he talked about conditions that might cause the Fed to reduce
its $85 billion-a-month in bond purchases aimed at stimulating the
"The danger is that vulnerabilities that build up during a period of
very accomodative monetary policy can unwind suddenly when such
policy is reversed, creating substantial market volatility," Lagarde
said in prepared remarks.
"We already got a taste of it during the taper tantrum ... I am
afraid this may not be a one-off episode."
Lagarde said advanced economies could help reduce the risk of market
volatility by communicating policy intentions clearly. But she added
that emerging markets that had tackled economic vulnerabilities had
fared better when shockwaves hit in 2013.
"In particular, higher GDP growth, stronger external current account
positions, lower inflation and more liquid financial markets helped
dampen market volatility," said Lagarde, adding a more resilient
financial services sector would help.
India, Lagarde said, is pursuing reforms that are "timely, but will
also need to be pursued with the utmost speed".
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Speaking at the Reserve Bank of India, Lagarde said central banks
should also stand ready to act, with both liquidity support and
targeted foreign exchange interventions.
India has cut rates twice in out-of-cycle moves this year. In a
statement published alongside its last cut, the RBI said the
possible spillover of volatility from international financial
markets was "a significant risk".
(Reporting by Rafael Nam and Swati Bhat; Writing by Clara Ferreira
Marques; Editing by Douglas Busvine)
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