With an expected liftoff in U.S. interest rates, there may be some modest pressures on financial conditions and capital flows for emerging and developing economies over the coming months, says the June 2015 issue of Global Economic Prospects. This process is expected to unfold relatively smoothly since the US economic recovery is continuing and interest rates remain low in other major global economies.
However, there are considerable risks around this expectation, the report argues. Just as the initial discussion about U.S. policy normalization caused turmoil in financial markets in 2013 – now referred to as the "taper tantrum" – the U.S. Federal Reserve’s first interest rate increase and subsequent tightening cycle since the global financial crisis could ignite market volatility and reduce capital flows to emerging markets by up to 1.8 percentage points of GDP, the report says.
This would especially hurt emerging markets with greater vulnerabilities and weakening growth prospects. For commodity-exporting emerging markets that are already struggling to adjust to persistently low commodity prices, or for countries experiencing policy uncertainty, a slowdown in capital flows would add to their policy challenges.
http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015b/Global-Economic-Prospects-June-2015-Rising-US-interest-rates.pdf
