INFLATED BRIC!!! Special Report By CapitalHeight
02/25/2011

Chairman Bernanke's experiment with quantitative easing continues to have unintended consequences for the global economy, due to the impact of the equation highlighted below:

Online PR News – 25-February-2011 – –  Introduction
Chairman Bernanke's experiment with quantitative easing continues to have unintended consequences for the global economy, due to the impact of the equation highlighted below:

QE2 = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]

While prices for food and energy have been rising, inflation in the United States has remained relatively subdued. One common explanation for that phenomenon is that U.S. inflation has been "exported" to China and elsewhere through the U.S. Federal Reserve's monetary policy. And given the perennial U.S. balance of payments deficit, it's good to know the country has found something it can successfully export!

 Inflated BRIC
China, India, and Brazil all currently have massive inflation problems. China, which has increased its inflation by holding down its currency against the dollar, has been very proactive in tackling inflation as of late. The People's Bank of China (PBOC) surprised the markets on Christmas Day by raising its one-year refinancing rate by 52 basis points to 3.85% and increasing the benchmark deposit rate by 25 basis points to 2.75%.

 Inflation and Policy Stance
A brief review of global economic data points highlights struggles with inflation in three very key countries: China, India and Brazil. While the divergence between each country's responses reminds us that both inflation and monetary policy are local, analyzing them collectively allows us to derive the equation laid out on first page.

1) Country: BRAZIL
Policy Stance: Reactive
Last fall, Brazil's monetary policy graded out less than favorably due to its relatively late reaction (compared to China) in fighting inflation. But it appears Brazil is finally ready to shift the fight into high gear in January, after raising reserve requirements early last month. Analysis of Brazilian interest rate swaps suggests traders are betting bhike in benchmark Selic rate by 50bps to 11.25% in January.

2) Country: RUSSIA
Policy Stance: Active
Russia may need to let its currency rise to curb inflation and that the government should begin withdrawing its huge fiscal stimulus. A return to a policy of resisting nominal ruble appreciation could send inflation back to double-digit levels. Monetary policy should focus firmly on inflation control in the context of a more flexible exchange rate.

3) Country: INDIA
Policy Stance: Inactive
India continues to lag in its bout with taming inflation, opting instead for the "wait and see" approach with regard to implementing another rounds of tightening. Having shifted from his hawkish stance (six rate hikes in 2010 and 1 in Jan 2011) to a more relaxed position. That would be fine if India had inflation under control.

4) Country: CHINA
Policy Stance: Proactive
On a relative basis, China has been particularly proactive in its fight with inflation of late, hiking interest rates twice in the last 2.5 months, raising banks' reserve requirements, and announcing potential price controls and supply rationing in its food market. China has proactively fought speculation and its latest Purchasing Managers' Index (PMI) report shows early signs of success.

GET THE FULL INSIGHT ON THE REPORT HERE

http://www.capitalheight.com/specialreports/Inflated%20BRIC.pdf
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