Swift interest rate hikes aimed at containing inflation in product and asset prices could cause another downturn in the slowly recovering economies of the United States and Europe, the head of the World Bank said.
Waiting for bubbles to burst and then cleaning up the aftermath is now a new lesson of what not to do, World Bank President Robert Zoellick said in an article published in Wednesday's Financial Times.
But tightening interest rates too abruptly -- especially where recoveries are weak, such as in the U.S. and Europe -- could trigger another downturn.
Zoellick noted that Australia's central bank had already raised interest rates, which may put Asian countries with close links to Australia's economy under pressure to follow suit.
But raising rates while the Fed keeps its rates close to zero would cause Asian currencies to appreciate. This would make their exports more expensive and decrease overseas sales, hurting recoveries based on exports.
He said there was also competition from China: The renminbi is tied to a declining U.S. dollar that makes Chinese goods cheaper to buy than those of Asian rivals.
(Reporting by Jan Dahinten; Editing by Muralikumar Anantharaman)