China’s yuan, central bank performing well under stress, but US Fed rates adding to pressures

The world’s ‘bank for central banks’ has said China and other Asian economies have performed well, but high interest rates from the US are ramping up pressure

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With the US Federal Reserve maintaining high interest rates, stress is accumulating on the currencies of developing economies. Photo: Reuters

Published: 7:00pm, 4 Jul 2024

Prolonged high interest rates in the United States could introduce uncertainty to the monetary policy outlook of emerging economies, the world’s “bank for central banks” said, pointing to rising pressures on Asian currencies and capital outflows.

In its Annual Economic Report published on Sunday, the Basel-based Bank for International Settlements (BIS) said the banking industry expects greater divergence in policy rate trajectories – especially between the US Federal Reserve and other central banks – raising broader questions about their impact on capital flows and financial markets.

“In general, central banks around the world have so far done a very good job containing inflation. But the job is not finished yet,” said Zhang Tao, chief representative of the BIS office for Asia and the Pacific.

“If interest rates stay higher and [the US dollar] remains stronger, whether the system can continue to face the pressures remains to be seen,” he said.

Zhang said that since the Asian financial crisis of 1997, central banks have adopted either flexible or inflexible inflation targeting regimes, supported by flexible foreign exchange rates.

As such, the fundamentals of emerging economies are better than they were during that trying period, he said.