IMF warns emerging economies could face turbulence when Fed raises interest rates – business live

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In the City, shares in UK housebuilders have dropped after the government ordered them to pay £4bn to help remove dangerous cladding from buildings.

In a letter to property developers this morning, secretary of state for levelling up, housing and communities Michael Gove said they must help foot the bill, following the Grenfell Tower disaster in 2017.

“It is neither fair nor decent that innocent leaseholders, many of whom have worked hard and made sacrifices to get a foot on the housing ladder, should be landed with bills they cannot afford to fix problems they did not cause,”

Gove is unveiling the £4bn package today to help leaseholders escape the onerous costs involved in replacing combustible cladding. Those who live in blocks between 11m and 18m tall will no longer face crippling bills, which had run into tens of thousands of pounds.

Speaking on the BBC Today programme (after being freed from the Broadcasting House lift), Gove explains that the big housebuilders have all been making significant profits, so need to make a fair contribution to the cost of replacing Grenfell-style cladding.

Housebuilders are leading the FTSE 100 fallers, with Persimmon (-3.6%), Barratt Development (-3.2%), Taylor Wimpey (-3%) Berkeley Group (-2.8%) all weaker.

The government expects that all developers responsible for affected buildings with annual profits from housebuilding of at least £10m will be in the frame for paying up under the new plan.

Gove is giving developers until March to come up with a fully funded plan for resolving the cladding crisis. Otherwise, ministers could restrict access to government funds and future procurement if they fail to act, or legislate to force them to pay up.

Housebuilders had already set aside funds for cladding issues, and the industry argues that other organisations are also involved in the construction of affected buildings, including housing associations, local authorities, and the manufacturers who produced materials that weren’t fit for purpose.

Campaigners have warned that leaseholders face other serious fire-safety problems, and massive costs to fix. That includes defective fire doors, flammable balconies and missing firebreaks because of non-compliant building works. Here’s the full story.

Related: Gove must spend ‘billions more’ to end building fire safety crisis


The prospect of America raising interest rates, and unwinding its bond purchase stimulus programme, is weighing on global markets – so the IMF’s blogpost is well-timed.

Shares, and other riskier assets such as bitcoin, fell last week, as investors anticipated that the Federal Reserve could unwind its balance sheet sooner and faster than expected.

Sovereign bond prices have also fallen, driving up the interest rates on government debt, as traders anticipate the Fed lifting rates and reducing its holdings of US Treasuries during 2022.

Jim Reid of Deutsche Bank says it’s been a dramatic start to the year:

To be fair the Fed were starting to catch up with reality late last year but Omicron meant that the market was reluctant to read their more hawkish move as entirely realistic given the risks that the variant presented.

However the holiday season provided more evidence that Omicron was notably milder, especially amongst the vaccinated, and the result has been that the market has looked through this more than they were willing to before Xmas whilst at the same time the Fed have become even more hawkish by upping the ante on QT. So a perfect storm.

Introduction: IMF says emerging economies must prepare for Fed policy tightening

© Provided by The Guardian
America’s Federal Reserve could send turbulence through the markets if it tightens monetary policy this year Photograph: Joshua Roberts/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Turbulence could be approaching as the US central bank prepares to wind back its massive stimulus programme, and emerging economies would be in the front line.

The International Monetary Fund has warned this morning that emerging markets could suffer painful spillovers once the US Federal Reserve starts to tighten monetary policy. With US inflation hitting near 40-year highs, US interest rates could rise soon.

Those spillovers could include capital surging out of emerging markets, dragging down their currencies. That would be particularly serious for countries with large debts or high inflation.

The IMF explains in a new blogpost this morning:

Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally.

These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.

© Provided by The Guardian
IMF report showing how tighter US monetary policy affects emerging markets

The Fed is on track to end its asset-purchase programme in March, and expects to raise interest rates three times this year.

The minutes of its December meeting show that it could start to cut its balance sheet, known as quantitative tightening (QT), soon too — news that rattled the markets last week.

Such tightening could have more severe implications for vulnerable countries, the IMF adds:

In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar.

The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies.

So, with the Fed sounding hawkish, and omicron hitting supply chains and pushing up costs, emerging market policymakers need to prepare for a storm.

Several emerging economies, such as Brazil, Russia, and South Africa, raised their interest rates in 2021, due to high inflation.

But more action may be needed. Those with high debts denominated in foreign currencies should look to reduce, or hedge, that exposure, while those with high debts may need to cut spending or lift taxes faster, the IMF says.

Such ‘fiscal tightening’ would weigh on growth and employment, of course, which highlights the dilemma facing emerging market politicians and central bankers.

Worryingly, the IMF also warns that there could be bank failures in some weaker countries, saying:

For countries where corporate debt and bad loans were high even before the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution regimes should be readied.

The ongoing Covid-19 pandemic also threatens emerging markets — many of whom have not benefitted from the mass vaccination rollouts seen in advanced economies.

Related: A new Covid variant is no surprise when rich countries are hoarding vaccines | Gordon Brown

The IMF concludes:

While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic.

Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.

The agenda

  • 10am GMT: Eurozone unemployment figures for November
  • 3pm GMT: US wholesale inventories for November

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