India’s central bank yesterday raised lending rates by a bigger-than-expected 50 basis points, its ninth hike in 15 months to curb inflation, and said that the move could slow economic growth.
The Reserve Bank of India raised its repo — the rate at which it lends to commercial banks — to 7.25 percent and increased its reverse repo — the rate it pays to banks for deposits — to 6.25 percent.
“Reining in inflation should gain priority over growth, even if it creates some short-term shocks like lower growth,” Reserve Bank of India Governor Duvvuri Subbarao said after bank policymakers met in India’s financial hub Mumbai.
“Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence,” he said.
India’s benchmark 30-share SENSEX tumbled 1.08 percent or 205.23 points to 18,729.79 points after the rate announcement.
The central bank’s step comes as Asian economies from Taiwan, South Korea, Indonesia, to China are all battling inflationary pressures.
The bank’s meeting followed data showing annual inflation had unexpectedly surged to 8.98 percent in March from 8.31 percent the previous month.
“We expect inflation to remain at elevated levels through the first half of the year, before it starts to moderate,” Subbarao said.
The bank had previously hiked rates in gradual, quarter-percentage point steps to minimize the impact on growth, but this time acted more boldly.
“This move was necessary. Inflationary pressures are still very high,” Indian Minister of Finance Pranab Mukherjee told reporters.
Meanwhile, Australia’s central bank yesterday left interest rates on hold at 4.75 percent, as widely expected, but warned of possible rising inflation over the longer term as the economy improves.
The Reserve Bank of Australia (RBA) last lifted rates in November last year, and in a statement said its current mildly restrictive monetary policy stance remained appropriate.
“In future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation,” RBA Governor Glenn Stevens said.
Stevens said that devastating floods and the destructive Cylone Yasi, which hit the Australian east coast earlier this year, would affect growth and had caused a sharp spike in the price of fruit and vegetables.
However, he said while this price shock was temporary and would dissipate during coming quarters, recent information suggested that the marked decline in underlying inflation from the peak in 2008 had now run its course.
Official data last week showed a surprise 1.6 percent rise in consumer prices during the March quarter — its highest quarterly rise in five years. Meanwhile, the consumer price index rose 3.3 percent from a year earlier to be well beyond the central bank’s 2 percent to 3 percent target range.
“While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected,” Stevens said.