BRIC's Monetary Policy Overview (05.15.10)


Although BRIC's, with the exception of Russia, have already initiated some form of monetary policy tightening, they have been very reluctant in rising cost of credit. Indeed, series of interest rate hikes may hamper consumption and cause and inflow of speculative capital looking for an higher yield. This in turn may trigger the currency appreciation, hurt exporters and eventually stop the recovery. In this article, we take a close look at every BRIC member monetary policy.

During the recent global downturn, Brazil, Russia, India and China, also known as BRIC, sustained, with the exception of Russia, better growth than most countries. Indeed, a vast fiscal stimulus program and interest rate cuts provided significant help to distressed economies, thus boosting production and consumption. Yet, the recent growth is also raising concerns about inflation and overheating. And although those emerging economies already initiated some form of monetary policy tightening, most have been very reluctant in rising cost of credit. Mostly because many fear that a series of interest rate hikes may hamper consumption and cause and inflow of speculative capital looking for an higher yield. This in turn may trigger the currency appreciation, hurt exporters and eventually stop the recovery. In this article, we take a close look at every BRIC member monetary policy.

People's Bank of China

After an unprecedented 8.5% GDP growth in 2009, which was stimulated by loose monetary policy and a huge fiscal stimulus, the Chinese economy is keeping up with more than momentum. In the first quarter of 2010, it expanded 12.2% on the quarterly basis in spite of gradual stimulus removal. However, growth in demand exceeds that in supply and it is clear the country is expanding above its potential growth rate which may lead to a pickup in inflationary pressure. In fact, after a small drop in March, growth in consumer prices is on track with 2.8% increase in April. Yet, so far, the Chinese government have been more focused on slowing down the property prices instead of initiating monetary policy tightening. Indeed, although China ordered banks to set aside more deposits as reserves for the third time this year, since January 2009 the interest rate has been on hold at 5.31%. Looking further, many economists are anticipating the increase in cost of borrowing within the next few months. However, we can't forget that People's Bank of China is very reluctant in hiking interest rates because it may prompt a sell-off on stocks and create some social unrest.

 

Reserve Bank of India

In the 2008/09 fiscal year, India's economy expanded 6.7%, weathering surprisingly well the global crisis and a poor monsoon. And this year's projections start at 8.5% as domestic consumption is rising, agriculture is growing and the monsoon's forecast indicates good crops. Yet, with demand growing at a faster pace than supply, inflation is becoming a growing concern. Not surprising, the Reserve Bank of India has raised its benchmark interest rates twice to 3.75%. And it is expected that by the end of June the rate may increase as much as 100 basis points. However, India's central bank should be more cautious in shifting its monetary policy. Tightening too much or too early is likely to squeeze credit availability and weight on growth which is essential in keeping fiscal deficit at sustainable levels.


 

Central Bank of Brazil

Last year, in the wake of the worst global economic crisis since the Great Depression, Brazil's GDP growth dropped only 0.2%. This year, renewed global demand for Brazil's exports, expansion of credit and government incentives are likely to make Brazil, the biggest economy in Latin America, to grow more than 6%. Yet, the fast pace of expansion may also lead to overheating of the economy, which can result in significant rise in consumer prices. For example, in March, industrial production rose by 20% as companies try to cope with rising demand. Also, in April, inflation went up 5.26% from a year earlier, the fourth consecutive month above the 4.5% central bank target. However, the Central Bank of Brazil's Monetary Policy Committee (COPOM...


Anna Fedec, contact@tradingeconomics.com
5/15/2010 4:10:07 PM