Emerging economies should tighten monetary policy

Developing nations face inflationary pressures

By Wouter Klijn
Thu 17 Jul 2008

Emerging economies should not blindly follow the US monetary policy and take measures to contain inflation.

Emerging economies should tighten their monetary policy to keep inflation at bay, Reserve Bank of Australia (RBA) governor Glenn Stevens said yesterday.

"What is needed is for emerging countries to adjust their policies according to their circumstances. Without that, we risk a new manifestation of the 'global imbalances', in which too much of the burden of controlling inflation would be placed on the major advanced countries, where growth is already slowing," Stevens told a function in Sydney.

Many developing countries have their currencies, directly or indirectly, pegged to the US dollar, but the economic circumstances in these countries are quite different from those in the US. If they continued to follow US policy, it could lead to permanently high inflation rates, Stevens said.

He said a growing number of developing countries, including China, India, Brazil and Indonesia, had taken steps to tighten  monetary policy.

A high inflation rate in developing countries could pose problems for Australia, as the strongest demand for minerals is in these countries. But Stevens warned Australia also faced inflationary pressures that did not relate to emerging economies.

Despite all this, there are signs inflation in Australia will decline in the medium term.

"CPI inflation might rise further before it starts to come down, particularly given the recent further surge in global oil prices," Stevens said.

"On the information available at present, we still expect inflation to fall back to 3 per cent by mid-2010 and to continue declining gradually thereafter."

The Government yesterday released its green paper on emissions trading, which estimates the scheme's effect on inflation at 0.9 per cent. Stevens said the central bank had not been consulted on that figure. "Climate change is not our job," he said.

He said the bank had not looked into the report yet and, therefore, could not say what it would mean for  monetary policy. "It's the first time I've heard that number," he said.

Stevens spoke at a fundraiser for the Anika Foundation, which promotes research into adolescent depression and suicide, in Sydney. He is a member of the foundation board.

Go to today's InvestorDaily news

More stories by this author