SINGAPORE, Oct. 6 (UPI) -- Inflation across Asia has been rising but inviting differing policy responses.
While in the Philippines, the central bank remains biased to stay on hold, the Thai central bank is considering tightening. Meanwhile, core inflation in Korea remains in the upper half of the central bank's target, but the central bank is loosening to stimulate growth. With most Asian central banks on the defensive, investors should expect more monetary policy adjustments in the coming weeks.
In most of the region inflation is now at a five-year high and the Asian Development Bank recently estimated that a temporary $10 per barrel increase in oil prices would result in a 0.5 percent increase in CPI in the region, while a similar sustained increase would result in a 1.1 percent increase in CPI
In September some record inflation data were reported around the region though some countries performed better than others. Inflation remains benign in Singapore (1.6 percent in August) and Malaysia (1.4 percent in Aug), while moderating CPI inflation in September in Indonesia (6.3 percent) suggested inflation momentum could have peaked.
But in Thailand, consumer prices rose much faster than expected last month with headline CPI rose 3.6 percent, after a 3.1 percent increase in August. The increase was almost entirely due to higher fuel prices despite government controls on fuel prices, which have been in place since the beginning of the year.
And in the Philippines, inflation rose to 6.9 percent in September from 6.3 percent in August with the surge gain caused by oil-related and food items. Average inflation for the year now stands at 4.8 percent and will easily exceed the central bank's 5 percent target.
In Taiwan, headline CPI also printed a higher-than-expected 2.8 percent year on year in September, validating the central bank's start last month to a tightening phase.
While the U.S. Federal Reserves has raised interest rate by 75 basis points in the past three months, only Taiwan and Hong Kong banks have started tightening, while Korea has cut the central bank lending rate by 25 basis points and other economies have not changed their interest rate policy.
The historical correlation between East Asia and the U.S. monetary policies has been quite high.
Andy Xie, economist at Morgan Stanley noted the recent decoupling is happening because the weak-dollar trade caused massive capital inflow into Asia, and the 'measured' pace that the Fed is raising interest rate is deflating the weak-dollar trade gradually.
"Asian central banks do not have to raise interest rates in the short term with rising foreign exchange reserves or having sterilized a big chunk of the recent increase," he said.
But tightening liquidity conditions would force Asian central banks to raise
interest rates and foreign exchange reserves stopped rising significantly in August. "The tipping point appears to have been reached," Xie said. "If foreign exchange reserves decelerate or even decline, the economies that have not sterilized the sharp rise of the reserves will have to raise interest rate," he added.
On Tuesday, Thai Finance Minister P Chidamrabam warned central banks in the region should take on a cautious approach to reviewing interest rates so that policy initiatives to stabilize prices do not hinder growth.
Amongst the central banks in the region, the Bank of Thailand has communicated one of the most hawkish stances, several times indicating the need for pre-emptive steps to address accelerating inflation.
Bank of Thailand Deputy Governor Bandid Nijathaworn recently warned interest rates might have to go up again at the bank's October 20 policy meeting to quell inflationary pressure from rising oil prices.
"The (Thai) central bank has de-emphasized core inflation in recent months, focusing on headline inflation and the currency as reasons to raise rates. Hence, we still expect they will raise rates once more this year in light of the rise in headline inflation and our expectation that it will continue to
rise in the fourth quarter," said Michael Spencer, Asia chief economist at Deutsche Bank.
Meanwhile, the Philippine central bank has indicated it wants to keep monetary policy on hold, believing that the price increases are resulting from supply-side cost pressures beyond the scope of monetary policy.
But many analysts believe the central bank will have to hike the rate by 25 basis points sometimes this quarter, especially if the peso continued to weaken.
"We think that the sharp rise in consumer prices over the last four months strengthens the case for rate increases by year-end. Core inflation has matched headline inflation suggesting that oil prices have already raised non-food and non-energy items," said Euben Paracuelles, economist at DBS Bank, adding a 50 basis point rate hike was likely before year end.
