The great recession 2007-08 is history now and world is in the brink of recovery (different opinions about shape of recovery) with different pace in different places. Now almost all central bankers (both developed and developing countries) are worried about the future course of monetary actions.
Developed countries like US, UK, European Union and Japan have maintained their respective interest rate at very low levels almost equal to zero to avoid the depression. Since economy is now trying to recover from the crisis, these above mentioned country's central bankers are facing their own issues and are in dilemma whether to reverse the monetary stimulus or to go ahead with the present status for some more time?
US is getting mixed data from its economy as it Job data, and inflation data are on the positive side where as housing data is still under the pressure. UK is under the threat of Inflation and Japan is bombarded by Tsunami, nuclear crisis and 2 lost decades. European union is in dilemma as its different constituents are in very widely diverged due to countries like Germany and Ireland (or Greece) are like south and north poles in all aspects of economy.
Coming to developing countries like BRIC (Brazil, Russia, India and China) are clearly under the tremendous inflation pressure. India and China's central bankers increased their respective interest rates almost on an average once in a two month (from more than a year) to control the inflation. Brazil is under the threat of "hot money" flow due to interest rate parity and threating its currency competency. Russians are facing bubble kind of formation in almost all asset class due to rapid increase in their valuation.
Now the big question for all the central bankers is what next?
Yesterday, Tuesday, April 5th 2011 PBOC (People's Bank of China) has increased the lending and deposit rates by 25 basis points to from 6.06% to 6.31% and 3.0% to 3.25% respectively to curb the inflation. According to last available data China's CPI data for the month of February was 4.9% which is almost 1% higher than the PBOC's comfort (target) zone. But the problem PBOC might face in coming days is slower growth as it has forecast a lower GDP for coming years. Remember China spent massive amount (more than 4 trillion yuan) during the crisis times and its banks lent more than double the government spending/stimulus. So the base effect along with reverse the stimulus effect and lesser(than earlier) advantage of currency competence (due to international pressure to yuan pegging) may cause hindrance to Chinese.
Indian central banker, RBI (Reserve Bank of India) has already raised repo rate 8 times (200 basis points) from last one year and still it is indicating the targeting of the inflation. According to latest available data, WPI for February is 8.3% which above 8%, a revised target of RBI (RBI revised its inflation target from 7% to 8%). And RBI hinting to increase the interest rate in first week of May, 2011 when RBI is scheduled to meet. But in the process of inflation target RBI might loose out on GDP growth which has already shown some deceleration in IIP data and also due higher oil imports and high commodity prices cutting the margins of corporate houses and etc.
Tomorrow, April 7th 2011 ECB (European Central Bank) is meeting and many analysts are expecting ECB to increase the interest rates to target the inflation. ECB might be worried about the December inflation of 2.2% which above its target of 2%, but what about Greece, Ireland and other debt ridden Euro zone countries growth! Will it start the process for other developed countries to follow?
MPC (Monetary Policy Committee) of Bank of England is in traction to take the first step to increase the interest rates from 0.5% to 0.75% to target the inflation, but question of the hour is when? According to latest available inflation data for February is increased to 4.4% (from 4%) above the Bank of England's comfort zone of 2%. So will it bite the bullet?
Now there is lot discussion is happening around the FED's possible about QE2 (Quantitative Easing 2), FED rate, Inflation (is 2.1% and FED's target is 2%). FED might be worried about its history of 1936-37 of recession after great depression in 1930. (In the course of 10 months between 1936-1937, FED doubled its interest rates by causing recession!). It also might be wondering about the consequences of premature stimulus exit.
In almost all the cases of central bankers, everybody is targeting inflation and inflation, mainly increased due to spike in oil prices, high commodity price and higher primary food articles. And inflation in most of the cases is supply side issue also instead of just increase demand! Whether mere increase in interest rates (further more in the case of developing countries) will curb the inflation immediately, without derailing the growth prospects? Global economy may not be ready to face another credit crunch! At the same time, artificial asset boosting by keeping near zero interest rates is also not good for the longer term economy, as fast history is in front us!