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Inflationary pressures remain subdued

Despite the monetary stimulus in high-income countries and an acceleration in developing-country growth in 2012Q4, inflationary pressures remain relatively subdued, although East Asia & Pacific, the Middle East & North Africa and South Asia are showing signs of rising inflation (figure 10). Inflation in high-income countries remains low. Inflationary pressures in China appear to have eased but may be intensifying in Indonesia and Lao PDR following years of rapid growth and relatively loose macroeconomic policy, and core inflation remains high in Vietnam. In the Middle East & North Africa, high prices reflect both efforts to reduce the fiscal burden of price subsidization by raising some regulated prices, as well as supply disruptions caused by civil and armed strife. In South Asia, increases in regulated prices have also played a role, as have tight market conditions despite the relatively slow pace of growth.

Figure 10
Inflation is broadly under control

Source: World Bank, Datastream, IMF IFS

In contrast, inflation rates in developing Europe and Central Asia have declined to close to 7 percent, down somewhat from the 8½ to 9 percent average during the pre-crisis period. The easing partly reflects still-large output gaps, but structural reforms have also contributed.

Monetary policy in developing countries continues to ease. Since January, the Reserve Bank of India has cut interest rates by a cumulative 75 basis points despite still strong inflationary pressures. In Mexico, the central bank has cut rates by 50 basis points—its first interest rate cut since July 2009. Other policy easing included a 100-basis-point cut implemented by the Bank of Colombia in three consecutive actions. Interest rates were also lowered in Albania, Azerbaijan, Belarus, Georgia, Kenya, Mongolia, Sri Lanka, Thailand, Turkey, Uganda, and Vietnam. Only five developing countries (Brazil, the Arab Republic of Egypt, Gambia, Ghana, and Tunisia) have raised interest rates in 2013; Serbia raised and then cut rates.

Although global inflationary pressures remain benign, given the lags in monetary policy transmission, this additional easing may add to a strengthening activity already under way, resulting in additional inflationary pressures in countries operating close to full capacity, without much payoff in additional output.

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