As the Federal Reserve raised interest rates today, here's how economists think the US policy tightening will impact the world economy:
Central Banks in Latin America are likely to begin hiking rates in response, according to Ian Shepherdson at Pantheon Macroeconomics.
The Brazilian real has fallen 32 per cent against the US dollar this year, the Colombian peso has plunged 30 per cent, and the Mexican peso has hit a new record low this week.
“We don’t expect a collapse in LatAm economies in response to the Fed’s liftoff, as most economies are better prepared for tighter financial conditions than in the past. But to safeguard their currencies, or just to try to limit the damage, most LatAm Central Banks will likely hike interest rates in tandem with the Fed,” Sheperdson said.
The Eurozone’s direct trade links with the US are relatively weak – only 12 per cent of the region's goods exports cross the Atlantic, says economist Jonathan Loynes from Capital Economics.
A faster-than-expected tightening next year may even weaken the euro further, helping the region's exporters. The euro has fallen 20 per cent against the dollar since February 2014.
“Even if the Fed fails to control market expectations and US long term interest rates rise substantially, it is not clear that this will be mirrored by Eurozone rates,” Loynes said.
“But there is no room for complacency... Should Eurozone bond yields be dragged higher or the euro fail to decline, the case for the ECB to move further in the opposite direction to the Fed will strengthen.”
The Bank for International Settlements (BIS), a club for the world’s central banks, has warned about the rise in dollar debt outside the US. Borrowing in US dollars leaves households and businesses vulnerable to exchange rates.
The BIS reckons that emerging markets dollar borrowing has now surpassed $3 trillion (£2 trillion). Globally it puts the figure at over $9 trillion. It blames the rise of dollar debts outside the US on low rates at the Federal Reserve.
“The large emerging markets that will likely be most affected are those, such as Brazil, Russia, Turkey and to some extent South Africa, where severe domestic challenges have contributed to exchange rate and financial market instability. These sovereigns have little policy room to protect growth and buffer themselves from external shocks,” said Steven Hess, a senior vice president at Moody’s, a ratings agency.
The UK would be affected by a depreciation of the pound against the dollar and weaker demand from the US.
“Excessively tight policy would slow growth, and significantly so if markets take it badly,” said Dan Hanson and Jamie Murray from Bloomberg Intelligence.
They believe a Federal Reserve policy error would delay the Bank of England’s first rate hike since the financial crisis until 2017.