Don’t fear rate hikes — US growth can beat ‘the new mediocre’
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Emerging Markets

Don’t fear rate hikes — US growth can beat ‘the new mediocre’

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Agustín Carstens, Jean-Claude Trichet and Henry Rotich, leading current and former policymakers, tell Emerging Markets why they trust the US Federal Reserve to handle the normalisation of monetary policy with care

The world should not fear the Federal Reserve’s plans to raise interest rates, current and former policymakers from three continents have argued. Agustín Carstens, Jean-Claude Trichet and Henry Rotich said they trusted that the US central bank would move “progressively”.

The Bank of Mexico governor, former European Central Bank president and Kenyan finance minister all argued that rising rates would be a sign of faster American economic growth, which would benefit the global economy and enable other countries to take the tightening in their stride.

Carstens said the global economy could avoid what IMF managing director Christine Lagarde yesterday called the “new mediocre” of long term low growth, even as the Fed prepares for an interest rate hike in the coming months.

“Normalisation is something that is desirable, especially if it can be done in an orderly way,” he said. “For the world economy it is desirable to have a strong USA, especially when the situation in Europe and in other latitudes are not so promising.

“If this [growth] comes from the US, the whole unconventional monetary policy to renew growth would have been a worthwhile exercise, even though in the short term it may create some volatility.”

DEEPER SURGERY

However, Carstens said a lot would depend on how the US economy adjusted. If the policy change took place in the context of a strong US recovery, the consequences would be “minor”.

However, “if it happens more as a result of a shock or some other type of vulnerability, I would say the result on emerging markets will be different.”

Carstens said it was not yet clear whether the current low growth period was a cyclical or structural phenomenon. “If it is a cyclical issue, then it is something we can solve relatively easily in the medium term,” he said. “If it is more structural then deeper surgery would be needed.”

The Mexican governor has also warned against potential capital outflows. “The challenge is to preserve capital flows that have come from different countries, even in a scenario where interest rates are being normalised,” he said. “Risks should be contemplated and countries should prepare for that to happen.”

Rotich said that while rising borrowing costs would “limit” Kenya’s access to international capital markets, the country had already taken advantage of historic low interest rates to fix its funding.

Kenya issued a $2bn infrastructure bond this week, including a five year tranche at 6.875% and a 10 year at 8.75%. “We are aware of the impact of [an] interest rate increase,” he told Emerging Markets.

Trichet said he was “confident” the Fed would manage to deal with this “re-entering the atmosphere operation in good conditions”. “I don’t have any serious doubt,” the former ECB chief said.

“Overall, I think it is a good thing that the Fed will exit progressively such an abnormal situation, which has unexpected and non-negligible consequences on certain market segments and asset classes.”

Trichet urged policymakers in the meantime to focus more on job creation than economic growth. “This is the most important problem. We should do the utmost to focus on job creation. Growth is necessary to the extent it contributes to reach full employment once again. And job creation, particularly for young people, depends crucially on the implementation of bold structural reforms.”

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