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Ready for a US Rate Hike?

MANILA – The possibility that the US Federal Reserve could raise the interest rate for the first time in a decade sent jitters across emerging markets for weeks. Though the Fed has now decided to keep its policy rate ‎unchanged, it also stated that a rate hike is still on the table for 2015. The concern is that countries that are dependent on foreign financing could be hit by sudden outflows of international capital, or that currency depreciation following the Fed hike could raise debt-servicing costs for countries and businesses.

Governments in the developing world would be wise to worry less about interest-rate changes in the United States – which, in any case, they cannot control – and think more about policy changes they can make at home to strengthen their economies’ resilience.

An increase in US interest rates is not necessarily bad news for emerging countries. Many developing countries – especially in Asia – are in much better macroeconomic shape than they were just before the Asian financial crisis of the late 1990s or at the onset of the 2008 global financial crisis.

And the Fed is likely to raise rates only if it judges US economic growth to be strong and sustainable, which would be a positive sign for the global economy in general. Furthermore, a delay in raising rates carries its own dangers, encouraging yield-hungry investors to take larger risks – possibly necessitating a sharper or more abrupt change in interest rates in the future.