Asia’s Inflation Dilemma

Is last week’s surprise hike to 9 percent in the Reserve Bank of India’s interest rate the harbinger of interest rate increases across Asia? Or is India an exceptional case, both in terms of its macroeconomic situation and the timing of its rise? Central banks and governments everywhere are faced with the dilemma: For sure, inflation is high and interest rates in real terms mostly at or near negative throughout the region. But many argue that with oil and food prices both off their peaks, the worst has passed. Thus interest rate rises would merely compound the problems of slowing global growth as US demand stagnates and even China’s expansion might suddenly shrivel. In which case rate hikes would be worse than too late.

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