Rapid Inflation Ties Hands of Central Banks

I’ve often written in these pages about the slowdown in China and the recession in Europe that are hampering economic growth.

Central banks around the world, in response to the lack of economic growth, want to cut interest rates to spur growth. Unlike here in the U.S., interest rates in many parts of the world are at more normal levels, which are prompting governments to want to cut rates further in order to stimulate economic growth.

China wants to stimulate its economic growth, but the central bank is hesitant to cut interest rates because of rapid inflation, which accelerated more than forecast in March 2012, because of a rise in food and gas prices.

Russia’s central bank would like to spark economic growth by cutting interest rates, but it is barred from doing so because of rapid inflation; with food and oil especially. Indonesia kept its interest rates unchanged as well, as rapid inflation was at levels not seen in seven months.

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Thailand and Taiwan’s central banks also maintained their interest rate policies. Although they would love to cut interest rates to spur economic growth, they are erring on the side of caution due to rapid inflation pressures; again, food and oil are the main culprits.

Australia is experiencing slow growth and would like nothing better than to cut interest rates. While it did so in December of last year, the central bank has been hesitant the last few months because although economic growth is not picking up, but rapid inflation is.

For the first time in three years, the central bank of India wants to cut interest rates in a bid to jump start economic growth in that country. However, rapid inflation, especially with food and oil prices, is making the central bank’s decision very challenging indeed. It is expected that the central bank of India may cut interest rates by 0.25% instead of the 1.0% it wanted to originally, because of the persistence of rapid inflation.

The Bank of England is printing money and is doing what it can to help the economy, as it claims that the rate of rapid inflation will slow in 2012. However, the rapid inflation numbers being released by the country continue to come in above the central bank’s forecast. The worst part is that the rapid inflation rate is greater than income growth, which further eats into economic growth.

The European Central Bank (ECB) cut its interest rate twice to combat the recession being experienced right now in the eurozone, but cutting more may be out of the question, as the rapid inflation rate persists. The ECB wants to stimulate economic growth, but the rate of rapid inflation doesn’t want to cooperate. The inflation rate in the eurozone in March 2012 was higher than forecast.

As a natural response to slowing economic growth, one of the main tools that central banks around the world can use to stimulate economic growth is cutting interest rates. However, when rapid inflation persists, it prevents the central bank from doing so.

Watch that stock market rally. Higher interest rates are not that far off in the future. (Also see: Proof Stock Market Rally’s Just an Old-fashioned Bear Trap.)

Where the Market Stands; Where it’s Headed:

Crazy stock market so far this month. We only had 14 trading days in April and half of them have been 100-point or more movement days for the Dow Jones Industrial Average! Usually, this much up-and-down volatility is a sign.

To me, it is a sign the stock market is putting in a top. The bear market rally that started in March of 2009 is getting very close to topping out. From there, the stock market will move lower until QE3 is announced, which will give temporary support to the market.

What He Said:

“ I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.