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This article is about the IMF's warning that some Asian countries growth could experience rapid inflation due to their fast growth. They recommend tighter monetary policy to avoid careening into a period of high inflation that could cause recession. China is the main example cited but other countries in the region have the potential to overheat as well. Do you guys think that monetary policy will be sufficient to keep inflation in check? And will the high growth rates lead to an influx of foreign investment that could drive asset prices up even higher?
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Federal Funds rate by country:
ReplyDeleteChina: 6.06%
Japan: 0.1%
India: 6.75%
United States: 0.25%
Discount Rate by country:
Japan: 0.3%
United States: 0.86%
China: 2.79%
India: 6.00%
Just for comparison Zimbabwe: 975.00%
China already has high interest rates compared to other developed counties, but according to the IMF real interest rates are still negative. This makes grounds for the argument that rates are still not high enough. The other problem as the article mentions is that the Yuan is pegged to the U.S dollar on a tightly controlled float system. By removing such constraints Yuan appreciation would result in a tightening of monetary conditions and reduce the burden to be borne by higher policy rates. Thus, the IMF is recommending a two fold plan, higher interest rates and relaxed currency control.
From the looks of it as the report suggests, current inflation is thought to be a result of increased demand which the IMF says may not be linked to the generalized overheating of China. Basically, they are saying that China needs to keep a close eye on things and be prepared to tighten monetary policy should inflation continue but action right now is not necessary.
Here's the full report: http://www.imf.org/external/pubs/ft/reo/2011/apd/eng/areo0411.pdf its 90 pages but I looked through it because I wanted to try and get a better understanding of why a floating currency would help curb inflation.
I don't think China's inflation rate is a huge concern to be honest. I know they have to be careful that it doesn't get out of hand, but to achieve significant growth I think a country needs to take on a maintainable level of inflation.
ReplyDeleteI agree with both of the previous statements. China appears to have a handle on their increasing inflation, however they need to make sure they continue to have it under control.
ReplyDeleteNice research Chris. While I agree for the most part with Dane and Becky, the problem arises in the idea of 'having control.' In all of our readings thus far, I think one of the biggest take aways is the tendency to believe that a country has control or that a market's red flags are actually positives-that this time is different. China is also facing a potential housing bubble and I'm sure other economic and market factors. Inflation could be an impending issue.
ReplyDeleteAs Chris has shown, current interest rates in China are not high enough for them to be concerned quite yet about inflation. If interest rates, however, do increase substantly and inflation does begin to rise I believe strict monetary policy can be the answer. But the key word here is strict.. However, I think China can avoid the scare of inflation if they keep a close eye on things, and are well prepared for hightened monetary policy in the future if need be.
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