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July 7, 2008

What do the world’s central banks need to do ASAP to bring inflation under control?


“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 an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. 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.

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