The world’s major central banks are still (on the whole) following a low-interest rate policy. The Bank of Japan is following a nominal 0% interest rate; the Federal Reserve is offering 0.25% for its Federal Funds; the Bank of England interest rate is fixed at 0.5% and the ECB is offering a very generous 1.25%. Of course, these are official rates at which the central bank makes money available; they do not reflect the commercial rates offered by merchant and high street banks. The purpose of this policy is that by keeping money “cheap”, businesses will be encouraged to expand and the economy will grow.
A downside of lose monetary control by the central banks is that it can allow inflation to rise which is a very bad thing if prices get ahead of income increases (usually the case, of course). In most of the world’s major economies, current inflation levels are above their targets, but generating growth and stimulating employment are currently higher priorities.
Spare a thought for India. India is one of the world’s most important emerging economies and is likely to see renewed investment from first world players when problems nearer to home finally come under proper control. The Reserve Bank of India has increased its interest rate twelve times since March 2010 in a concerted bid to get inflation under control. In a country with a large and relatively poor population, rising prices for essentials such as food and energy might lead to civil unrest – particularly when a conspicuous elite are enjoying the high life.
The interest rate currently stands at a whopping 8.25% in India, but before you rush to place your funds there, the inflation figure stands at 9.72% – but it did fall marginally last month. What this means is that your buying power would decline by 1.5% each year were you to leave money on deposit there. Despite all the problems which have befallen the Euro over the past year, the currency has risen by 8.6% against the Indian Rupee and currently, €1 will buy 67.4410 Rupees. This means (from a European perspective) that Indian goods and services are 8.6% cheaper than they were a year ago.