The emerging market economies of the world are taking tightening steps, in part to offset the effects of the U.S. Fed's "quantitative easing". Yesterday Australia raised interest rates by 1/4% to 4.75%. Australia is widely viewed as a proxy for China given their commodities exports to the Chinese. India has also raised rates with their central bank rate for short-term funds now at 6.25%.
These countries are worried about capital flows from the U.S. (and other developed markets) being enhanced by the increased liquidity from the anticipated next step of Fed quantitative easing. As capital flows to the emerging markets it will cause inflationary increases in all goods. Increased interest rates and increases in their currency relative to the U.S. are two ways these emerging economies can fight inflation.
All of this reminds us that the effects of any market or policy changes are global. The key for investors is to keep this global point of view in mind as they make portfolio decisions.
