Implications of inflation in emerging market
July 14th, 2008 by ALVIN SOONG
How do we see the inflation and actions taken by Central Banks in Emerging Markets:
-China: moneyary polcies highly politicised and subordinate to government’s growth policies. Interest rates by central banks are weak and major part of monetary policy is conducted by exchange rate policy. Also Structural Change in China of labour moving from town to city and to keep labour rates low in China and through cheap dollar linked currency export this deflation in goods prices to rest of the world. In short, a huge productivity improvement in CHina caused global deflation.
-Indonesia: Central bank targets domestic inflation and runs a de facto exchange rate target.
-Russia: Central bak subject to political prssure to keep control of inflation and reduce currency appreciation
-Brazillian Central Bank: Not independent and is similar within emerging markets to a developed economy. Central bank is relatively hawkish and keeps eye firm on inflation, but does not target exchange rate nor subject to government interference
Monetary authorities in emerging markets response to inflation:
1. Knee jerk short term measures to control prices including subsidies, price controls, export bans for certain food and large pay increases to public sector employees
2. Higher interest rates
3. Appreciating currencies
4. Productivity improvements, particularly in agriculture
5. Developing alternative enery sources
In short, contined inflation pressure is a bigger threat to emerging markets than a US recession and actions have to be taken fast soon.
Summarised from the Edge April June 16
