World Bank report predicts further volatility for global financial markets

Global financial markets face more volatility in the short term as nations adjust to higher interest rates and emerging economies deal with a projected decline in capital inflows, according to a World Bank report.

“The gradual return of long-term interest rates in both high-income and developing countries to more normal levels should help reduce the excesses and vulnerabilities associated with a persistently low interest-rate environment,” the bank said in the report. “In the near term, however, the transition to higher global interest rates could be volatile.”

Net private capital inflows to developing countries are projected to fall to $1.065 trillion (€776m) this year from $1.078trn in 2013, the Washington-based bank said in the report. Financing conditions “are likely to tighten further in the coming months as monetary policies continue to normalise.”

“This, combined with a shrinking growth differential between developing and high-income countries, should translate into weaker capital inflows to developing countries this year,” the lender said in the report released as Group of 20 finance officials prepared for weekend talks in Sydney.

Should global borrowing costs rise more abruptly than expected or volatility become entrenched, “more disorderly adjustments could not be ruled out”.

The Federal Reserve’s decisions in December and January to taper its monthly bond purchasing weren’t the cause of recent emerging-market turmoil, according to the report.

— Bloomberg