The International Monetary Fund (IMF) has issued a warning about the impact of ‘sticky’ US inflation and potential delays in Federal Reserve rate cuts on the global economy. The organization highlighted the risk of a dollar rally leading to government debt strains, especially for developing countries. Additionally, the IIF pointed out the increasing debt pile in the US under President Joe Biden’s administration, despite households in the country reducing their personal loans and credit card debts.
While household balance sheets in the US may provide some protection against rising interest rates, government budget deficits remain high compared to pre-pandemic levels. In response, the IMF urged governments worldwide to show fiscal restraint and maintain sound public finances, especially in an election year with the temptation to cut taxes or increase spending.
The IIF also raised concerns about rising trade frictions and geopolitical tensions affecting the external debt servicing capacity of emerging markets that have high levels of dollar-denominated debt. It noted that stubborn inflation, particularly in the US, poses a significant risk by increasing global funding costs. Additionally, trade disputes and protectionist policies could hinder economic growth and investment flows, further impacting the ability of emerging and frontier markets to service their debts.
