World splits in two as East tightens while West stays super-loose
India has raised interest rates and issued a stark warning on inflation dangers, joining China, Brazil, and other tiger economies in concerted moves to tighten policy.
By Ambrose Evans-Pritchard
27 Jul 2010
The central bank raised its reverse repo rate a half point to 4.5pc, still far below the level of inflation. Food prices have been rising at 16pc.
“Inflationary pressures have exacerbated and become generalized. Real policy rates are not consistent with the strong growth that the economy has been witnessing. It is imperative that we continue to normalise our policy,” said the bank, which also raised its repurchase rate a quarter point to 5.75pc.
“The bank is fiddling while Rome burns: this is little more than a token gesture,” said Maya Bhandari from Lombard Street Research. The combined fiscal deficit of the central government, states, and hidden subsidies has been running at 11pc, despite a boom that has flattered the deficit figures when adjusted for the cycle.
Ms Bhandari said rises in public wages have increasingly been “monetised” by the ultra-loose policies of the central bank. Inflation is now at risk of spiralling out of control. Primary articles inflation, watched as a leading indicator, is already at 16.5pc.
India has run into serious capacity constraints, relying on rickety infrastructure and an outdated energy grid that cannot sustain break-neck industrialization.
By contrast, China has invested heavily in roads, railways, airports, and power plants. Its excess credit growth has created a different set of threats, chiefly a property bubble in key cities and an overhang of bad debts from local governments. The central bank is using “financial repression” to curb property speculation, but strains are already emerging. A banking regulator said almost a quarter of $1.1 trillion of loans to local governments are at risk of default.
Brazil has gone furthest in slamming on the brakes, raising rates last week by half a point to 10.75pc. “Brazil’s central bank is the most aggressive in the world right now,” said Daniel Tenengauzer from Bank of America.
“We expect a big drop in BRICS growth (Brazil, Russia, India, China) from monetary tightening. Asia seems most vulnerable to a global growth slowdown because it is the most leveraged region,” he said. The ratio of credit to GDP has reached 127pc in China. The bank has cut its growth forecast next year to 9pc for China and 4pc for Brazil
Australia has raised rates five times already since the financial crisis. Malaysia, Korea, and Thailand have also tightened. Israel raised rates for the fourth time this week to 1.75pc to choke off a housing bubble.
The contrast with convalescent OECD states in the West has rarely been starker. Both the US Federal Reserve and the Bank of England have hinted at further asset purchases or quantitative easing if the recovery falters over coming months.
Meanwhile, the European Central Bank began to buy sovereign debt for the first time in May to support the bond markets of Greece, Portugal, and Spain.
The concern is that the emerging world will be forced to tighten even harder before the West has recovered enough to pick up the growth baton. That would risk tipping Europe and the US into deflation.