What do the world’s central banks need to do ASAP to bring inflation under control?
*Bloomberg, by John Fraher and Shamim Adam, July 7, 2008:
“Policy makers in emerging economies from Russia to Vietnam may have
to start acting less like Ben S. Bernanke and more like Paul Volcker if
they want to bring inflation under control.
With currencies tied to the U.S. dollar, officials in many developing
countries have had to keep their monetary policies linked to the
Federal Reserve's. Now, after chairman Bernanke led the Fed's most
aggressive easing in two decades, their central banks find themselves
with interest rates too low for their economies and the worst bout of
inflation in a generation.
‘There's a lack of independent monetary policy; it’s been
inappropriately stimulative,’ says Nariman Behravesh, chief economist
with Global Insight in Lexington, Massachusetts. The answer, he says,
may be to ‘tighten credit more aggressively,’ the way then-chairman
Volcker did in the early 1980s.
Such a policy shift would mean pushing borrowing costs above the level
of inflation and keeping them there even at the cost of a steep
slowdown that might send commodity prices into a tailspin. Faced with
inflation that approached 15 percent in 1980, Volcker pushed interest
rates as high as 20 percent and drove the U.S. into its deepest
recession since the 1930s.
Prices are now surging across the developing world. China's inflation
rate stayed near a 12-year high of 8.7 percent in May; prices in
Vietnam jumped 27 percent in June and Indian wholesale prices increased
11.6 percent last month, the fastest in 13 years. Inflation exceeds
benchmark lending rates in China, Russia, India and at least a dozen
other emerging economies.
Doing Something
‘They can't sit on their hands any longer, and need to start reacting
in order to be seen to be doing something,’ says Robert
Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore.
‘Interest rates do need to go a lot higher.’
Rate increases big enough to slow down some of the world's
fastest-growing economies would help Bernanke, 54, and European Central
Bank President Jean-Claude Trichet in their own inflation fights by
cooling the commodity-price boom.
Trichet, 65, said in an interview last month that there's a risk of
inflation ‘exploding’ if central banks don't act decisively; the ECB
last week raised its benchmark lending rate a quarter point to a
seven-year high of 4.25 percent. The price of oil has almost doubled in
the past year, touching a record $145.85 on July 3, and wheat and rice
prices jumped more than 50 percent in the same period.”
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
Call Now
Let us help you:
Personal Advisors
available now at
1-800-444-8317