Real real one

India raised its interest rate again yesterday for the 3rd time in 2 months to fight the persistently high inflation. As such its interest rate now is at 9% from 8.5%. Also on the rise was India's cash reserve ratio which has now gone up from 8.75% to 9%. So far, at least 7 countries in Asia have joined many others around the world in monetary tightening mode. Many agrees it is better to fight inflation now and foregoing growth as a high inflation will be difficult to reduce latter down the road. Raising interest rate will have its negative implications on stock markets, business activities and importantly, employment. Is this the general trend now among central banks around the world in view of the higher inflation? Will there be any winners and losers from the current stance of central banks?

In a simple attempt to answer the above questions, I have listed below are some of the economic figures(hope I remember them correctly) sorted by Country/GDP growth/interest rate/inflation:

US 1.5%/2%/4%

Euro Zone 2.5%/4.25%/4%

India 8%/9%/7%

Malaysia 5%/3.5%/7.7%

China 10%/7.49%/7%

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NZ -0.3%/8%/4%

From the above, I have reworked a simple calculation of the countries real GDP growth(ie nominal GDP- inflation rate) and real interest rate*(Interest rate - inflation rate). The end results are sorted by Country/real GDP/real interest rate/monetary policies.

US -2.5%/-2% -has been reducing interest rate since last year and now paused awaiting real growth

Euro Zone -1.75%/0.25%-raised interest rate recently, may pause as real growth still negative

India -1%/+2%-raised interest rate aggressively lately but may pause as real growth will wosen further

Malaysia 1.5%/-4.2%-did not raised interest rate yet emphasising on real growth

China 2.51%/0.49%-has been on monetary tightening(via capital reserve requirement) but did not raise/reduce interest yet emphasising on real growth and inflation

NZ -8.3%/4%-speeding monetary loosening as real growth simply slows down too much

What does the above mean? In theory, for those with monetary loosening policies, the local currency will see weakness while monetary tightening policies will see stronger currency. For those countries with unbiased policies like Malaysia but having weaker growth and high inflation, we will see the currency weakening further. To counter this effect, the Malaysian central bank can increase the reserve ratio requirements, physical or non physical intervention in the money market to defend its currency etc. In regard to real interest rate, countries with negative rate will be less opportunity for appreciation in the near future. As such, our ringgit will be under pressure unless Bank Negara uses the country's war (foreign currency account) chest to support the local currency. I suspect NZ currency will continue to drop as it continues reducing interest rate but it may be supported as it still gives great interest rate differentials compared to other currency. Looks like most central banks have a "REAL" big task ahead, stay alert! Winners and losers will be decided later!

* Added. This analysis uses borrowing rate instead of 12 mth FD rates. Normally, FD rates are lower than borrowing rates.

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* TheHeraldTribune: White House predicted Bush administration would bequeath a record deficit of USD482b to the next president( it has not accounted for the full cost of military operations in Iraq and Afghanistan and other economic stimulus packages introduced since early this year).