Thursday, May 30, 2024

Sustained U.S. Inflation Bad News for Emerging Countries

“Higher US rates for longer means bad news for most emerging markets including Pakistan. Higher US rates raise the risk premium curve of all the rest of the world and pulls in money to the US. For Pakistan, the government has been planning to tap the international markets for bond raise and this requires interest rate to decrease to a level at which the borrowing would be possible.

U.S. inflation read of 3.5% for March has spooked global markets. Money printing binge, trade sanctions on oil producing countries and the trade war with China has unfortunately created structural inflation in the US. It is proving to be stickier than expected by the FED and even 23-year high level of interest rates are not bringing it under the targeted level of 2%.

Higher inflation also leads to further polarization in society, creating friction between the rich and the poor, but as long as protectionism is in place, it is hard to address inflation as high tariffs push up fuel prices and lead to higher prices on the market.

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