The U.S. Federal Reserve’s decision could be an advantage for emerging markets
Yesterday, the United States Federal Reserve (Fed) policy-making committee met to discuss the highly anticipated hike in its interest rates. At the end of the session, the Fed resolved that interest rates will remain unchanged. According to financial analysts, this is worrisome for international investors and stock brokers, because of instability within the global financial market; this reluctance raise to raise interest rates has caused European stock markets to crash. However, as stocks and currencies in emerging markets are vulnerable to higher US interest rates, these countries hope the Fed retains the postponement of the increase for at least a month.
Since 2008, the interest rates were between 0 to 0.25%. and significantly, nine members of the key policy-making committee of the Fed voted to keep the status quo.
Investors and business speculators who hoped that the interest rates would be raised, were disappointed when the Fed Chair, Janet Yellen announced yesterday that the domestic economic climate within the U.S. warrants the decision to keep interest rates where they are.
What the hike could mean to emerging markets
For emerging markets, especially in Africa, a hike in interest rates could be grave. Many African countries have yet to recover from the crash of the Chinese stock market and an increase in the Fed reserve rate will do greater harm.
Higher interest rates could also escalate the indebtedness of borrower nations. Low interest rates have led many borrowers to stake their necks in trillions of dollars in debt. When the interest rates bounce up, the dollar will rise in value and many of those debts could become unsustainable. Anticipating a hike in the Fed interest rates, several investors started pulling out of some emerging markets but their expectations were cut short.
The current climate shows that the current interest rates are working for emerging markets. This past Thursday, South Africa’s stocks rose, lifting the benchmark to a record high; the Johannesburg Stock Exchange (JSE) Top- 40 went up 1.2%. In anticipation of the Fed’s move, Egypt Central Bank tightened its monetary policy to balance inflation risks with economic growth. Experts also suggest that the Fed’s anticipated decision also stimulated the tightening of fiscal policies in Kenya, Nigeria and Angola.
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