Rising interest rates in US will hinder foreign economies

WASHINGTON (AP) — When the Federal Reserve raises interest rates — as it did Wednesday — the impact doesn't stop with US homebuyers paying more for mortgages or main street business owners facing costlier bank loans.

The fallout can be felt beyond America's borders, hitting shopkeepers in Sri Lanka, farmers in Mozambique and families in poorer countries around the world. The impacts abroad range from higher borrowing costs to depreciating currencies.

“It will put pressure on all types of developing countries,” said Eric LeCompte, executive director of the Jubilee USA Network, a coalition of groups seeking to reduce global poverty.

The managing director of the International Monetary Fund, Kristalina Georgieva, was worried enough last month to warn the Fed and other rate-hiking central banks to stay “mindful of the spillover risks to vulnerable emerging and developing economies.”

Citing the harsher financial conditions, the IMF recently downgraded the outlook for economic growth this year in developing and emerging market countries to 3.8%, a full percentage point below what it forecasted in January.

The Fed on Wednesday raised its benchmark short-term rate by half a percentage point to its highest level since the pandemic hit two years ago and signalled that more rate hikes will come.

The US rate hikes can deliver long-distance damage in a number of ways. First, they could slow the American economy and reduce US consumers' appetite for foreign goods.

They also affect global investment: As rates rise in the US, safer American government and corporate bonds start looking more attractive to global investors. So they can pull money out of poor and middle-income countries and invest it in the United States.

Those shifts drive up the US dollar and push down currencies in the developing world.

Falling currencies can cause problems. They make it more expensive to pay for imported food and other products. That is especially worrisome at a time when supply chain bottlenecks and the war in Ukraine have already disrupted shipments of grain and fertiliser and pushed up food prices worldwide to alarming levels.

To defend their sinking currencies, central banks in developing countries are likely to raise their own rates; some have already started. That can cause economic damage: It slows growth, wipes out jobs and squeezes business borrowers. It also forces indebted governments to spend more of their budgets on interest payments and less on things like fighting COVID-19 and feeding the poor.

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