Twisted Titan
13th January 2011, 07:47 AM
The Hidden Hand of the Usury is very active indeed.
http://www.reuters.com/article/idUSTRE70A29C20110111
Surging global food prices are an extra headache for emerging markets battling inflationary pressures, but they are unlikely to trigger a radical response by economic policymakers.
Call them complacent, but economists do not expect central banks will markedly quicken their exit from loose anti-crisis monetary policies, even though sky-high food costs could cause inflation expectations to deteriorate.
"Even in emerging Asia and Latin America, where the threat of a sustained rise in inflation is the highest, we think policymakers will end the year in a policy stance that is still growth-supportive," economists at J.P. Morgan said in a note.
The United Nations food agency said last Wednesday that food prices hit a record high last month, surpassing levels in 2008 that sparked riots in countries from Egypt to Haiti.
But Jonathan Anderson, who covers emerging markets for UBS, said global food price indexes would have to rise another 50 percent to deliver the same inflation impact as three years ago.
While weather shocks are disrupting food supplies, there has been no repeat of the leap in energy and fertilizer prices or of the accompanying hoarding that were features of the 2008 crisis; nor do underlying supply and demand dynamics appear to have changed, Anderson said.
"In this environment, as long as accelerating global food inflation is assumed to be a temporary phenomenon, and as long as we're not back to a full-on food price 'disaster' a la 2008, we believe that emerging market central banks will continue to be relatively relaxed in their policy response," he said in a report.
MARKET RISK
Higher food costs are feeding into higher inflation in rich countries too, but the impact is limited by the small share of food in their consumer spending. And with developed economies still suffering from subpar growth, there is little chance of rising food prices leading to broader inflation.
Although food prices are unlikely to have serious repercussions for emerging market growth or policies this year, the political fallout from food inflation and fears of excessive tightening could well rattle investors, Anderson said.
"Chinese and Indian markets have already shown what rising inflation can do to investment sentiment, and the recent volatility in Indonesia and Brazil in the face of rising headline CPI growth is another good example of what lies ahead if food costs continue to push up," he added.
Indonesia's stock market, the best performing major Asian bourse last year, has fallen nearly 9 percent from a record peak scaled last week on fears the central bank is behind the curve on tackling inflation.
Bank Indonesia last week left interest rates at a record low 6.5 percent, even though inflation ended 2010 near 7 percent, above the central bank's target ceiling of 6 percent.
Economists at Deutsche Bank said it made sense for monetary authorities to raise interest rates if growth was robust and inflation-adjusted interest rates were negative.
But they added: "Because most of the inflation pressure in Asia stems from commodities -- and mostly food -- we think raising interest rates will not necessarily be policymakers' first impulse."
CURRENCY DILEMMA
Increasing interest rates would underscore the determination of central banks to prevent higher food prices from becoming embedded in core inflation.
"This no time for complacency and the solid anchoring of inflation expectations is considered something that is important by all of us," European Central Bank President Jean-Claude Trichet said on Monday.
Increases in commodity prices "will have to be followed very, very closely", Trichet added after chairing talks on the global economy at a Bank for International Settlements.
However, the problem for emerging market policymakers is that raising rates at a time when yields in rich countries are close to zero would suck in more of the speculative capital that is helping to generate inflationary pressures in the first place.
Similarly, permitting faster exchange rate appreciation would dampen the inflationary impact of higher food costs but could attract unwanted hot money -- anathema to many central banks.
Brazil, for instance, despite inflation worries, unveiled tough measures last week to deter dollar short-selling and curb bets on a further rise in the country's currency, the real, which has gained about 13 percent since last May.
And in the case of China, a price setter for many commodities, the extra purchasing power of a stronger yuan could very well boost demand for everything from soybeans to iron ore.
In short, central banks have little choice but to pray to the weather gods and hope the spike in prices peters out.
http://www.reuters.com/article/idUSTRE70A29C20110111
Surging global food prices are an extra headache for emerging markets battling inflationary pressures, but they are unlikely to trigger a radical response by economic policymakers.
Call them complacent, but economists do not expect central banks will markedly quicken their exit from loose anti-crisis monetary policies, even though sky-high food costs could cause inflation expectations to deteriorate.
"Even in emerging Asia and Latin America, where the threat of a sustained rise in inflation is the highest, we think policymakers will end the year in a policy stance that is still growth-supportive," economists at J.P. Morgan said in a note.
The United Nations food agency said last Wednesday that food prices hit a record high last month, surpassing levels in 2008 that sparked riots in countries from Egypt to Haiti.
But Jonathan Anderson, who covers emerging markets for UBS, said global food price indexes would have to rise another 50 percent to deliver the same inflation impact as three years ago.
While weather shocks are disrupting food supplies, there has been no repeat of the leap in energy and fertilizer prices or of the accompanying hoarding that were features of the 2008 crisis; nor do underlying supply and demand dynamics appear to have changed, Anderson said.
"In this environment, as long as accelerating global food inflation is assumed to be a temporary phenomenon, and as long as we're not back to a full-on food price 'disaster' a la 2008, we believe that emerging market central banks will continue to be relatively relaxed in their policy response," he said in a report.
MARKET RISK
Higher food costs are feeding into higher inflation in rich countries too, but the impact is limited by the small share of food in their consumer spending. And with developed economies still suffering from subpar growth, there is little chance of rising food prices leading to broader inflation.
Although food prices are unlikely to have serious repercussions for emerging market growth or policies this year, the political fallout from food inflation and fears of excessive tightening could well rattle investors, Anderson said.
"Chinese and Indian markets have already shown what rising inflation can do to investment sentiment, and the recent volatility in Indonesia and Brazil in the face of rising headline CPI growth is another good example of what lies ahead if food costs continue to push up," he added.
Indonesia's stock market, the best performing major Asian bourse last year, has fallen nearly 9 percent from a record peak scaled last week on fears the central bank is behind the curve on tackling inflation.
Bank Indonesia last week left interest rates at a record low 6.5 percent, even though inflation ended 2010 near 7 percent, above the central bank's target ceiling of 6 percent.
Economists at Deutsche Bank said it made sense for monetary authorities to raise interest rates if growth was robust and inflation-adjusted interest rates were negative.
But they added: "Because most of the inflation pressure in Asia stems from commodities -- and mostly food -- we think raising interest rates will not necessarily be policymakers' first impulse."
CURRENCY DILEMMA
Increasing interest rates would underscore the determination of central banks to prevent higher food prices from becoming embedded in core inflation.
"This no time for complacency and the solid anchoring of inflation expectations is considered something that is important by all of us," European Central Bank President Jean-Claude Trichet said on Monday.
Increases in commodity prices "will have to be followed very, very closely", Trichet added after chairing talks on the global economy at a Bank for International Settlements.
However, the problem for emerging market policymakers is that raising rates at a time when yields in rich countries are close to zero would suck in more of the speculative capital that is helping to generate inflationary pressures in the first place.
Similarly, permitting faster exchange rate appreciation would dampen the inflationary impact of higher food costs but could attract unwanted hot money -- anathema to many central banks.
Brazil, for instance, despite inflation worries, unveiled tough measures last week to deter dollar short-selling and curb bets on a further rise in the country's currency, the real, which has gained about 13 percent since last May.
And in the case of China, a price setter for many commodities, the extra purchasing power of a stronger yuan could very well boost demand for everything from soybeans to iron ore.
In short, central banks have little choice but to pray to the weather gods and hope the spike in prices peters out.