NEW DELHI -- Fighting inflation has become a new mantra for emerging economies like India, Brazil, Turkey and Indonesia as U.S. moves to curtail quantitative easing help weaken their currencies, pushing up the cost of imported goods in these countries.
The Indian central bank unexpectedly raised its key policy interest rate 0.25 percentage point to 8% on Tuesday. In a news conference at the Reserve Bank of India's headquarters in Mumbai, Gov. Raghuram Rajan repeatedly said, "Consumer price inflation is too high; we need to bring it down." The repurchase rate has been hiked a total of 0.75 percentage point since he took office last September.
Consumer prices on the subcontinent are at the highest levels among emerging economies. Rajan is betting on a strategy of combating inflation through medium- and long-term monetary tightening. The central bank's advisory panel, set up last September by the governor, has just recommended inflation targeting that would bring down consumer price changes from more than 10% now to 4% eventually.
Consumers are on guard. In mid-January, major Brazilian daily Folha de S.Paulo ran a Web story detailing how people are coping with inflation.
"We used to buy 5 liters of milk a week, but now we are down to 4," one told the newspaper. "We have switched to cheaper salt and cooking oil," another said. Consumer prices in the South American country soared 5.91% in 2013 -- far above the 4.5% goal set by the central bank.
Weak local currencies are setting off inflation. Drops in currency value translate to costlier imports, driving consumer prices in general higher. Speculation that the U.S. would scale down its ultra-easy monetary policy triggered an exodus of money from emerging economies. In particular, currencies of nations with current-account deficits came under selling pressure in the market. The Brazilian real, the Indian rupee, the Indonesian rupiah, the South African rand and the Turkish lira are dubbed the Fragile Five.
Inflation is also exacerbated by underdeveloped infrastructure, such as a lack of food storage facilities and roads. In India, prices have risen nearly 40% for onions -- the key ingredient in the nation's cuisine -- and other vegetables. In Turkey, bread prices have gone up more than 11%.
The Turkish central bank is holding an emergency policy meeting Tuesday to address inflation and the battered Turkish lira. Market observers say the view is gaining currency that the central bank would boost short-term interest rates as much as 2.25 percentage points to 10%.
For some emerging countries, where economies are losing steam, higher interest rates are not all that desirable. But faced with soaring consumer prices, the central banks have no choice but to become inflation busters, as in the case of Brazil. Its central bank has raised the policy rate seven times since April of last year, by a total of 3.25 percentage points.
Indonesia has been on an inflation-fighting track since last June, while India began taking action in September. Sandwiched between slowing economies and creeping inflation, these central banks are being asked to pull off near miracles.
--Nikkei staff writer Hidetake Miyamoto in Sao Paulo contributed to this article.