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Saving account holders or the Market, Govts. need to choose one.

The biggest threat that most of the countries especially the Emerging countries are facing is the risk of rising interest rate or use of other fiscal tools to control the inflation. Now for those countries which are facing the pressure of incoming flow of foreign moneys they, are actually feeling the real heat. Because due to interest rate hike lot of investing moneys will  be coming to that country, as a result of this their currency will be getting appreciated lot and this will create asset bubbles, as for example China.

Food, metal and oil are the main contributors to increase this inflation. As such the production cost increases due to input cost and that is making the consumption expenditure more.

Now let see some countries ---

PBOC  raised reserve requirement by 50 basis-point to 19.5%. Chinese CPI rose to 5.1% in November. China has raised the reserve requirements 6 times and interest rate 2 times in 2010. Chinese factory inflation decreases to certain amount.
India’s  WPI  rose to 8.43% in December 2010 from 7.48% in November. But more concern for India is the CPI, which is increasing at a faster rate. In the new year Indian stock exchanges faces lot of negative movement and the cause of it is, the rate hike which is coming  to control the inflation.
In December, Indonesian CPI reaches to 20-months high at 7%. It is facing inflation as real threat, as their stock market is showing the reaction of it.

According to some forecast Brazil’s CPI  will rise 4.60% in 2011. Central bank’s target of inflation is 4.5% +/- 2%. Policy makers raised their inflation forecast for 2011 by 0.5% . In last December country’s  inflation rate reached 5.91%.
In Russia inflation rose more than 8% at the end of 2010 and experts believe that it may 7% in 2011.
Two of the main problem that U.K. is facing now is rising unemployment and inflation, weak labor market and rise in consumer price index is the good indicator of that. These causes making people to revise their growth in 2011 to 1.1%.
U.K.’s inflation rate for December 2010 jumps into  3.7% from 3.3% in November.
Expert thinks that interest rate will rise in next June and if it is true it will be a rise more or less after 2 years. Rate of inflation may jumps from  3.3% to 4% with in few months . Recent  VAT rise also fuel the inflation. Bank of England has a target to keep inflation at 2%. Many experts think that bank may not increase the interest rate if job loss increases this way. Actually they fill an increase in interest rate will bring mortgage problem & rises in repossession that ultimately will delay economic recovery.  Anyway  house prices are falling in U.K. and if there is more increase in rate that will make thing worse  in coming days.

Euro zone inflation jumped from 1.9% to 2.2%. As  euro zone inflation rose above the ECB’s target in December, some countries like Germany’s December inflation rate quickens.
Bank of Korea forecasted that in 2011 CPI will  pick up to 3.5% from 2.9%, last Thursday South Korea raised it’s interest rate to tackle inflation. Expert says that we may see more rate hikes in South Korea in 2011.
Contrary to the others Taiwan’s inflation rate fell in December but CPI increases to 1.25% in December from earlier year, but it’s increase in CPI was slower than November figure. For 2011 experts expect inflation to be around 1.85%.
Chile’s inflation rate  increase to 3.89%, this is highest since November 2008. Central bank kept it’s benchmark rate at 3.25%. Central bank wants to weaken the currency and that may led  more rise in inflation. This future inflation increase may force central bank to raise interest rate. Here it is necessary to remember that Chile, Colombia and Peru are those countries where interest rate is lowest among the south American countries.
Venezuelan Govt expects inflation to be around 23-25% this year, Govts wants to weak the currency. Govt. may delay raising the price on regulated foods to delay the inflationary effects.
Some other country like Peru increased their base rate. Thailand raised it’s interest rate in few days ago for the 4th time in 7 months to handle inflation.

For countries which are facing trouble in their economy are facing more trouble due to rate hike to control their inflation because their economy will get slow if they hike rate and the mortgage payers will default more, so it will make things more worse.
Emerging countries such as India and Indonesia are facing quite a big threat, in coming future if not the coming days we may see the hike in interest rate for this countries. And also include China with them, although some are saying that Chinese inflation rate is coming under control. For India the threat is more because not only food price increase but also the oil subsidy which Govt. wants to withdraw in hurry makes thing beyond control. All this countries are facing huge sell-off in stock markets due to fear of rate hike.

In coming days govt. of this countries need to take bold decision either to give benefit to the saving account holders of the banks or to the markets especially the stock market.

NOTE :  Please see the disclaimer of this blog.


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