What's happening?

Federal Reserve raises interest rates for the first time in nearly a decade

The US central bank has raised interest rates by a quarter percentage point and pledged a gradual pace of increases

This marks the end to the near-zero borrowing costs that have prevailed since the US was struck by the worst financial crash in modern times.

Why would a rate rise in the US impact the emerging market countries?

We have already seen one of the main impacts: a stronger US dollar, backed by higher US interest rates, tends to depress the values of emerging market currencies at a time when many EM economies are already weakening and their currencies have already slumped against the greenback. The Fed’s rate rise could exacerbate the EM currency turmoil, and even help precipitate a full-blown crisis.

What is tightening and loosening?

When a central bank “loosens” or “eases” policy it essentially increases the supply of money in the economy and pushes down the cost of borrowing. This could be by lowering interest rates, or buying more assets with the aim of putting more money into circulation and encouraging greater economic activity.

“Tightening” is the opposite. If policymakers worry that an economy is begin to overheat, potentially generating too much inflation, they can tighten policy – such as raising the interest rate they charge banks to borrow from them, to make the cost of credit more expensive.

Changes to interest rates can take-up to 18 months to feed through into the real economy.

What is monetary policy?

Central bankers control more than just interest rates. “Monetary policy” is a broad brush term for a whole range of actions, including things like selling or buying assets such as government bonds, raising or reducing the amount of capital banks need to hold against liabilities, and raising or lowering interest rates.

All of these actions impact the cost and supply of money in an economy which are the main levers central banks use to try and keep inflation at its target level and the economy growing at a sustainable speed.

Changes in monetary policy can take-up to 18 months to feed through into the real economy.

Global market to show relief at smooth Fed lift off

Emerging market set to feel the wrath

Why the Fed faced with such a difficult decision

Low rates era challenges growth models

Turning point looms for US debt binge

Some emerging markets called on Fed to raise rates

Still need skill and luck

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What's happening?

Federal Reserve raises interest rates for the first time in nearly a decade

Why would a rate rise in the US impact the emerging market countries?

What is tightening and loosening?

What is monetary policy?

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