According to JP Morgan and Morgan Stanley, China may raise the benchmark lending rate by as many as 3 times in the first half of 2011 as inflation is a major concern in China. Other emerging countries are expected to do the same shortly.
Ever since the phillips curve created by William Phillip in 1958, which shows an inverse relationship between Inflation rate and unemployment rate, very few nations choose the maintain price stability. They were more concern on the rise in unemployment rate.
Then in the 1970's, rational expectation and non-accelerating inflation rate of unemployment (NAIRU) arose that explain the long run relationship between inflation rate and unemployment rate. Unemployment rate will be at natural rate of unemployment in long run. Inflation rate on the other hand will fluctuate accoordingly.
Although the phillips curve is no longer used as it is too simplistic, the long run relationship between the inflation rate and unemployment rate is still correct according to NAIRU.
Since in the long run, we will have natural rate of unemployment, it is not hard for any economist to target inflation rate especially when we know that money neutrality concept holds (through countless number of researches).
It seems like China are among the first nation in the world that realize that and they start increasing their key interest rate as early as February of 2007. Although they did eventually lower the overnight rate to 5.31% on December of 2008, it is still among the highest interest rate in the world (lower than other well managed economies such as Brazil and India).
Since money supply is now considered as exogenous by some Economists, perhaps the best way of lowering money supply thus lowering inflation is increase interest rate.
US and other developed countries still maintaining a superbly low interest rate simple for the reason of boosting employment and GDP but look at the BRIC nations. They all have high interest rate and they all have powerful growth of GDP and GNP.
India are another well managed economy. The unemployment rate continue to decrease while the key rate is kept at such a high level.
We still have quantitative easing 2 (QE2) to come. It seems like developed countries are not going for interest rate hike anytime soon.
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