Thailand’s central bank is expected on Wednesday to try to curb inflation, running at 8.9 per cent, by raising interest rates by as much as half a point. The Philippine central bank, confronting inflation of 11.4 per cent, a 14-year high, is likely to follow suit on Thursday.
Central banks in Asia’s developing economies are being forced to move rates as higher food and oil prices spill over into inflationary expectations. In a speech this month in Tokyo, Haruhiko Kuroda, president of the Asian Development Bank, called food and oil inflation the biggest risk to the region’s economic well-being.
“Many countries face a growing dilemma on monetary policy: how to gauge the right mix to control rising inflation without excessively slowing economic growth,” Mr Kuroda said. “If Asian authorities raise rates to combat inflation, the wider differentials may attract volatile portfolio investments and fuel asset-price inflation, increasing the risk of a hard landing. But the risk [will] be even greater if prices spiral out of control and feed higher inflationary expectations.”
The Bank of Japan, by contrast, on Tuesday left overnight interest rates firmly rooted at a lowly 0.5 per cent in spite of inflation having reached 1.5 per cent, a 15-year high. The central bank’s inaction is owed to a particular set of Japanese circumstances as the economy moves out of a decade of deflation.
Paul Sheard at Lehman Brothers describes the commodity price shock in developing Asia as dealing a “double punch”. It taxes growth directly by taking disposable money out of consumers’ pockets, and restricts central banks’ ability to provide support by easing monetary policy. Instead, many banks will have to tighten as headline inflation feeds through into wage pressure.
HSBC, however, predicts central banks will refrain from excessive tightening. They are calculating, the bank says, that food and oil prices, which account for most inflationary pressure, will start to abate as commodity prices ease and the baseline effect makes year-on-year comparisons easier.
Angel Gurría, secretary-general of the Organisation for Economic Co-operation and Development, says central banks should resist calls from politicians to favour protecting growth over suppressing inflation.
“If in doubt, target inflation, because if you turn the screw too far you can adjust later,” he said during a visit to South Africa. “But if you are too loose and inflation is sitting in your sitting room, it won’t leave easily.”
Mr Gurría said he believed the current slowdown would last at least until the end of this year, with metal and food prices potentially starting to fall from record highs but oil remaining in the region of $135-$150 a barrel because of “structural imbalances”.
Price rise figures this week from China, where core inflation excluding food and energy is far below headline inflation, could show a slowdown, economists say.
“Most central banks are hoping prices will moderate and that they won’t have to slam on the brakes,” says Peter Morgan, chief economist for Asia Pacific at HSBC. “They might just get away with it.
“But the big question comes if [food and energy] prices don’t moderate. What will they do then?” In that case, they could be storing worse problems for next year, some economists warn.
The Taylor rule, which relates monetary policy to inflation and movements in the output gap, suggests interest rate policy is too loose in China, South Korea, Malaysia, Taiwan and Thailand. By this measure, says JPMorgan, India, Indonesia and the Philippines are the worst offenders.
Adrian Mowat, chief Asian and emerging markets equity strategist at JPMorgan Securities, says central banks will try to sound more hawkish than they intend to be; if workers are persuaded the authorities can bring inflation under control, they may moderate wage claims that could otherwise set in train a wage-price spiral.
Additional reporting by Tom Burgis in Johannesburg
