Tuesday, November 2, 2010

Australia and India Continue to Hike Rates in Face of Money Printing Campaign from U.S., Japan, (and UK Again Soon)

Quite fascinating to watch this all play out - the continued easing of monetary policy in the developed world, transferred almost immediately via capital flows to faster growing and/or emerging markets, essentially importing inflation for those countries.   Overnight both Australia and India continued their fight against these money flows.  If there is no end to the QE train in 2011, intra country squabbling is sure to follow.  Especially as the Bank of England, Bank of Japan, and potentially European Central Bank are forced to retaliate to Easy Ben by printing more themselves.

  • Australia and India raised interest rates on Tuesday, in separate moves that highlighted the growing contrast between the Asia-Pacific region’s rapid growth and the still-fragile recovery in other parts of the world.
  • While central banks in the United States, Europe and Japan are still having to prop up their economies with very low interest rates — and the Federal Reserve is expected to announce additional pump-priming measures this week — many of their counterparts in developing Asia and in fast-growing Australia have been increasing the cost of borrowing again during this year.
  • Australia’s move to bump up its key cash rate to 4.75 percent, which few economists had expected, was the latest in a series of increases, which began in October 2009 and now totals 1.75 percentage points.
  • India, too, has pushed up rates gradually this year. On Tuesday it added another quarter of a percentage point to the repurchase rate for short-term lending, making it 6.25 percent, and to the reverse repurchase rate for short-term borrowing, now at 5.25 percent.
  • The Reserve Bank of India cited rising inflation pressures, which have become the major bugbear for policy makers throughout the region, as the reason for the latest rate increase.
  • Unencumbered by the debt levels that are still haunting their counterparts in the West, most Asian economies are set to enjoy robust growth this year. Increasing intra-Asian trade, including with China, also has helped offset the declining consumer demand in the United States.
  • China, Taiwan, South Korea and Malaysia also have started to increase borrowing costs, as have Brazil and other emerging market economies, though the cumulative moves by Australia and India have been among the most aggressive to date/
  • “Most commodity prices have firmed, after a fall earlier in the year,” Glenn Stevens, the governor of the Reserve Bank of Australia, said in a statement after the rate decision on Tuesday. “The prices most important to Australia remain at very high levels, with the result that the terms of trade are at their highest since the early 1950s.”
  • For many such countries, rising food and energy prices, rather than slow growth, have emerged as the main worry for policy makers.  India’s economy, for example, grew at a rate of 8.8% in the three months that ended in June, compared with the same period a year earlier. But the wholesale price index for September, the last one released before the central bank’s meeting, had risen at an annual rate of 8.62%, from 8.5% in August.
  • The Reserve Bank of Australia’s unexpected decision to stage another rate increase prompted the Australian dollar to jump on Tuesday. The currency has been steadily appreciating for months; by late afternoon in Sydney, one Australian dollar was worth almost exactly $1.
  • Other currencies in the region have been undergoing similar rises in recent months, as investors from slower-growing economies have sent cash into emerging markets in search of higher returns.
  • Although the phenomenon has been going on for many months, it gathered much steam over the summer, to the extent that policy makers have begun to fret that the currency appreciation could hurt their exporters, and that the capital inflows could send asset prices into bubble territory.
  • The widely anticipated move by the Fed to resume buying vast amounts of U.S. government debt to aid the economic recovery could prompt these capital flows into emerging markets to escalate further, analysts say. 
The Australian dollar is about to break parity with the US peso greenback.  To put it into perspective, at the height of the financial crisis Aussie dollars were trading at 60 cents on the USD.  For currency markets, that is an amazing move in 2 years.

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