ANKARA
There is danger of market instability in emerging markets should the U.S. Federal Reserve raise interest rates, International Monetary Fund managing director Christine Lagarde said.
Speaking at India's Reserve Bank in Mumbai late on Tuesday, Lagarde warned that the reaction to a U.S. interest rate hike could be a sharp outflow of funds from emerging markets.
"This is so because the timing of interest-rate liftoff and the pace of subsequent rate increase can still surprise markets," Lagarde explained.
Lagarde expressed concern about the high level of liquidities in the global financial markets, warning that this exacerbated the danger of market instability.
"The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility," Lagarde said.
Between 2009 and the end of 2012, emerging markets received about $4.5 trillion in gross capital inflows, representing roughly half of global capital flows, she said.
Lagarde said central banks needed to be ready to act. It may be necessary to provide domestic liquidity support to certain sectors or markets, she warned.
The Turkish central bank has said that it has the necessary policy tools to control outflow of capital, even after a potential Fed interest rate hike.
