FURTHER interest rate hikes by the U.S. Federal Reserve should be gradual or they risk hurting already fragile emerging economies, where many companies borrow in dollars, the head of the International Monetary Fund said yesterday.

    Christine Lagarde said a tightening in U.S. monetary policy, which started last month with the first rate hike in a decade, should be supported by “clear evidence” of inflation in the United States. She highlighted the negative implications for emerging economies.

    “The key issue going forward will be the pace of normalization. We agree that it should be gradual as announced, as stressed actually by the Fed, and based on clear evidence of firmer wage or price pressures,” she told a central banking conference in Paris.

    Investors have retreated from China’s slowing economy and other emerging markets, which had attracted hundreds of billions of dollars over the previous decade thanks to their superior returns over sluggish developed economies.

    Lagarde said higher U.S. rates, combined with easing in the eurozone and Japan, could push up the U.S. dollar, making life harder for the many companies in emerging economies that borrow in dollars.

    “For emerging economies, this could raise vulnerabilities in sectors with dollar exposures, especially corporates,” Lagarde said.

    Lagarde warned about further, sharp swings in exchange rates due to uncertainty about economic policy and the pace of the global economy.

    “Beyond dollar appreciation, there is also the potential for increased exchange rate volatility,” she said.

    “This volatility could be induced not only by the divergence in monetary policies in major advanced economies, but also by uncertainty about their overall prospects and policy action.”

    Lagarde said that a transformation of the Chinese economy toward slower growth will benefit everybody, even if the short-term impact rattles global trade, commodities and finance.

    China’s moves to weaken its currency and concerns about the country’s growth sparked turbulence on markets around the world at the start of 2016. Oil prices have tumbled and are likely to stay low “for a sustained period,” Lagarde said.

    But she backed China’s strategies in the long term.

    “China itself has embarked on an ambitious multiyear rebalancing of its economy, which is fine in and of itself and quite legitimate,” Lagarde said. “It’s a positive endeavor that in the long run, will benefit everybody,” Lagarde added.

    The head of the IMF also said the eurozone and Japan should continue with loose monetary policy to tackle low inflation and weak growth.

    (SD-Agencies)