Central banks try different tools to fight inflation

Central banks in Brazil, Chile and Thailand fretted on Thursday that high consumer prices could eat into economic gains, underscoring emerging markets' struggles to contain surging inflation. Different policy approaches in Thailand, South Korea, Chile and Brazil have so far yielded all-too similar results: stubbornly strong inflation rates that threaten to soar above policymakers' comfort zones.
Brazilian policymakers warned of a prolonged period of tighter borrowing costs, with annual inflation likely at or above its current near-target level until the fourth quarter. Under new chief Alexandre Tombini, the bank split last week on hiking the Selic rate to 12 percent from 11.75 percent, with a minority voting for 12.25 percent. But analysts said the minutes of the April 20 meeting, released on Thursday, took a harder line.
"This is a really tough document, maybe the most hawkish of the new central bank," said Jankiel Santos, chief economist for Espirito Santo Investment Bank in Sao Paulo. "They're clearly signalling that they've rethought their policy strategy." Annual inflation has already sped to 6.44 percent through mid-April - a hair's breadth away from the 6.5 percent target ceiling, despite a cumulative percentage point of rate hikes earlier this year and other measures aimed at curbing credit.
Chilean inflation was already seen breaching the target range of 3 percent, plus or minus 1 percentage point, this year, with Santiago policymakers seeing room to keep raising lending rates, Chile's central bank said, also in April meeting minutes released on Thursday.
Inflation is returning to normal after recent, more aggressive rate hikes have tempered expectations, although more remains to be done. Chile has raised its benchmark interest rate 400 basis points since June to 4.5 percent to contain price pressures fuelled by global commodity prices and robust growth.
Thailand's central bank said that even core inflation, which excludes volatile food and energy prices, could exceed its target in the second half of the year. The Bank of Thailand has been among Asia's most aggressive in raising rates, with six hikes since July and a seventh widely expected in June. What makes this episode of inflation particularly tricky is that much of the pressure is coming from abroad, in the form of rising oil and food prices.
Monetary policy has its limitations when it comes to cooling imported inflation. Raising rates in Thailand won't calm unrest in Libya, which is one of the biggest drivers of the recent rise in the price of oil. "Since the source of higher prices is, for the most part, external to Thailand, the standard medicine for inflation - higher interest rates - may not be that effective in slowing down price increases," World Bank economist Frederico Gil Sander wrote in a report published on Wednesday. South Korea has tried another approach, with the central bank leaving interest rates unchanged at its April meeting while authorities are letting the won rise sharply, which can help absorb inflationary pressure.
But that can create another set of headaches. The strong won has fuelled sharp gains in short-term foreign borrowing, and South Korea warned on Thursday it may impose new controls to try to prevent a destabilising flood of foreign capital. Central bank data released earlier in the day showed short-term foreign borrowing, mostly by banks, jumped by a net $6.72 billion in March, the third monthly increase in a row and the biggest gain since August 2008.
"The government wants to do something to curb a sharp rise in the won, any measures to tighten derivatives trade will have little impact on the market for now," said a senior foreign bank executive in Seoul, who asked not to be identified because his firm's policy does not allow him to be quoted in the media. "The won cannot help but go up further, considering strong exports and fund inflows. I think the government may have used a card too early," he said. Consumers still have their doubts about whether policymakers will succeed in quelling inflation.