IMF warns US stimulus efforts may trigger rapid rise in inflation

US President Joe Biden risks derailing recoveries across the world by triggering a “rapid rise” in interest rates with his huge stimulus efforts, the International Monetary Fund’s (IMF) chief has warned.

Kristalina Georgieva, IMF managing director, cautioned on a surge in borrowing costs that would send shockwaves across indebted economies and spark capital flight.

Mr Biden is said to be lining up more stimulus focused on transport infrastructure but economists have warned his $1.9trn of Covid relief could have negative side-effects if inflation takes off.

A faster US recovery could lead to “a sharp tightening of financial conditions” and add to the pressure in “vulnerable” emerging markets, Ms Georgieva said ahead of the IMF’s Spring meetings next week.

Her warning will increase concerns of a repeat of the 2013 “Taper Tantrum” that rattled emerging markets. Investors are ramping their bets on the US central bank bringing forward their interest rate hikes to stop the president’s huge fiscal stimulus overheating the economy.

Rising rates at the US Federal Reserve would have a knock-on impact by luring money out of emerging markets and ramping up the pressure on countries with large amounts of dollar-denominated debt, such as Turkey and Brazil.

“This would pose major challenges especially to middle-income countries with large external financing needs and elevated debt levels,” warned Ms Georgieva. “Many of those countries will need more support.”

Her warning came as gold prices slipped almost 2pc to below $1,700 after losing its shine amid rising bond yields and recovery hopes. The precious metal is on course for its first quarterly decline since 2018 as investors increase their bets on a rapid rebound in the US.

In addition to the $1.9trn (€1.6trn) of Covid relief, Mr Biden could also pump trillions of dollars more into the US economy in infrastructure investment. The president will unveil plans to rebuild roads, bridges and dams as part of his pledge for huge infrastructure spending.

Leading economists have warned that Mr Biden risks overheating the world’s largest economy.

Tom Rees

source:independent.ie