India raised interest rates for the second straight month yesterday and Australia signaled it could tighten policy further as the region’s economies rapidly recover, putting pressure on policymakers to keep inflation in check.
India and Australia are the only two G20 economies to have raised rates so far.
The Reserve Bank of India (RBI) raised its key policy rates by 25 basis points each, as expected, and also lifted its cash reserve ratio requirement for banks by quarter of a percentage point to drain more liquidity from the financial system as it battles inflation near double digits.
“With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalizing our policy instruments,” RBI Governor Duvvuri Subbarao said in a policy statement, after it raised its key short-term borrowing rate, or reverse repo, to 3.75 percent.
Asia’s third-largest economy is set to grow 8.5 percent in the current financial year and 9 percent the next, and inflation is spreading beyond food to fuel and manufactured goods such as cars. Annual inflation reached 9.9 percent last month, it fastest pace in 17 months.
Analysts expect the RBI to continue increasing interest rates throughout the year to bring them back towards pre-crisis levels.
In Australia, minutes from the central bank’s rate meeting earlier this month showed policymakers felt a boom in export earnings meant it could not delay a further hike in rates, leading investors to wager on another rise by June at the latest.
The Reserve Bank of Australia (RBA) felt a hike to 4.25 percent, its fifth in six policy meetings, was needed because surging prices for iron ore and coal exports would boost the economy more than expected just a few months ago.
The Australian dollar rose to A$0.9275 (US$0.86) after the minutes, from A$0.9256 before.
Implied rates showed the chance of a move next month edged up to 28 percent, from 25 percent, while interbank futures implied a 64 percent of a hike in June.
“A swift move to get back to normal levels seems almost certain,” said Bill Evans, chief economist at Westpac.
“We think that the next move will be in either May or June, and on balance, the very clear emphasis on the resources boom tips the scales towards May,” he said.
The minutes showed the RBA thought at this month’s meeting that rates were “a little below average” and that the April move was a step in the process of returning them to “normal” levels — or between 4.5 and 5 percent, many private-sector economists said.
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