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September 3, 2010 6:29 PM EDT
In late August, Thailand raised interest rates to 1.75 percent, its second hike this year. In July, India hiked interest rates to 5.75 percent, its second such boost that month and fourth this year. Meanwhile, the Federal Reserve is mulling a second round of quantitative easing if the U.S. economy further deteriorates.
Indeed, the monetary policy in developing economies versus mature economies like the U.S. have differed during and after the global financial crisis.
Generally speaking, developing economies have eased policy later than developed countries and are now normalizing policy sooner than them.
The global financial crisis originated in the U.S. and only later spread to the developing economies. For a short time, the emerging markets thought they had "decoupled" from developed economies and might escape unscathed from the U.S. financial crisis. When it became apparent the crisis was global, developing countries eased monetary policy, often as aggressive as their developed country counterparts, said Manoj Pradhan, an economist at Morgan Stanley.
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Coming out of the crisis, developing countries rebounded sooner and stronger than developed countries and their monetary policy have reflected that strength. Another impetus for tightening is the loose monetary policy of the G-10 countries that "spilled over" to emerging markets, said Pradhan.
Of the BRIC (Brazil-Russia-India-China) countries, Brazil, after raising interest rates by a total of 2 percentage points, is the closest to its pre-crisis monetary policy. India is the second closest with 1 percentage point worth of hikes.
For these two countries, their rate hikes and economic conditions have attracted capital inflows, which resulted in their currencies appreciating. This makes it difficult for their central banks to raise rates further, said Pradhan.
Pradhan expects Brazil to be the first country to finish the normalization process. He said growth risks there have increased because of monetary tightening and the expiration of fiscal stimulus measures, so Brazil is unlikely to raise interest rates much more.
In India, inflation is still a threat while the economy is showing no signs of slowing down. Morgan Stanley expects India's monetary policy to normalize some time in 2011.
China and Russia have not raised rates yet.
For China, its interest rates have fluctuated less than other BRIC countries because it is able to control credit more directly, said Pradhan. China actually has tightened in 2010; it did so by telling state-controlled banks to rein in lending and twice raising the reserve requirement ratio for big banks.
As far as China's interest rates are concerned, Morgan Stanley's China team expects no rate hikes in 2010 and a "modest but consistent pace" of tightening going forward.
In Russia, tightening has not started because its economy still needs accomodative monetary policy. In fact, they have only recently competed their rate cuts, the last one coming on May 31. Morgan Stanley expects Russia to raise rates starting 2011.
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