Asian central banks battle high inflation

2012-02-01 12:05

Jakarta/Seoul - Consumer inflation stayed high across Asia in January and could pick up further in some countries in coming months, leaving their central banks with few options to cushion the economies from the global slowdown.

Growth in consumer prices moderated in January on a year-on-year basis as expected in South Korea, Thailand and Indonesia, but prices picked up from December, data showed on Wednesday.

With worries about higher oil prices keeping inflation expectations high, central banks have little room to ease policy and boost domestic demand to make up for a weakening exports because of the European debt crisis.

“Asian central banks will be more worried on inflation in this nine-month period than on growth. But they will wait and see if the growth slowdown is more pronounced,” said Saktiandi Supaat, head of FX Research at Maybank in Singapore.

South Korea posted a surprise 6.6% annual drop in exports in January while Indonesian export growth also slid to its worst since late 2009, as demand from China and India fell along with Europe, signalling the global slowdown is also hurting emerging Asia.
South Korea’s inflation eased to a one-year low of 3.4% in January on lower fresh food prices, but high oil prices and anticipated hikes in public utility charges could drive it higher this year.
In Indonesia, the picture was similar, as annual inflation eased to 3.65%, but monthly prices ticked higher at 0.76% and consumer fretted about a government plan to hike subsidised fuel prices by as much as 44%.

“We see upside risks in the coming months regarding weather conditions, further public tariff hikes, and oil price inflation,” said Jaechul Chang of Citigroup in a report on South Korea, adding that headline inflation in the country will have to remain below 3% for Bank of Korea to cut rates.

Fuel prices are expected to rise this year, because of tensions between Iran and the West, and the average price of oil in 2012 is now seen at over $107 a barrel, a Reuters poll showed.

“We believe that January likely marks the bottom in headline inflation (in Indonesia),” said Prakriti Sofat at Barclays Capital in Singapore, adding central banks in both Indonesia and South Korea were likely to hold off from a rate cut for now.

In Thailand, where annual inflation dipped to 3.38% in January, the price of petrol and building materials still went up after severe flooding last year, leaving most economists leaning towards the view that the central bank will leave rates unchanged at its next meeting in March.

Forex focus

Thailand, Indonesia, Australia and the Philippines have all cut interest rates at least once in the past three months to try to shore up economic growth, but economists now appear to be scaling back prospects for further cuts.

After the US Federal Reserve last month extended its horizon for its first rate hike, analysts have said some economies could tinker with currency exchange rates instead of lowering interest rates.

Economists said policymakers in Seoul, already known for their policy of keeping the won cheap, could try to bring the currency down to support exporters but added the impact of any such efforts were likely to be limited.

Bank Indonesia intervened aggressively late last year to defend the rupiah at around 9,150 per US dollar, though let it weaken to 9,200 in January before a Moody’s upgrade led to renewed investor inflows that strengthened the currency.
“It seems central bankers are facing a dilemma and now the market starts to come up with a view that some central banks may not cut in the first half,” said Frances Cheung, senior strategist for Credit Agricole CIB in Hong Kong.

“Still, my view is Asian central banks will have to start cutting rates in the second quarter at the latest, given inflation is likely to ease as economic activity slows,” she added.