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 Published: 4:44PM BST 27 Jul 2010
The Reserve Bank of India is remaining vigilant about the threat that rising inflation poses.
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.
"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.