Asian inflation at records, some signs may be peaking

A US$20 retreat in oil prices from a record above US$147 a barrel earlier this month has helped brighten the inflation outlook

INFLATION in Asia is hitting new records, but the recent fall in the oil price and the prospect of slowing economic growth suggest it could be nearing its peak.

Core annual inflation in Australia scaled a 17-year high of 4.4 per cent in the second quarter, Singapore consumer prices rose 7.5 per cent in June, a 26-year high, and Malaysia’s inflation hit a 27-year peak of 7.7 per cent, double the rate recorded in May.

However, prices grew less than feared in Singapore and bang in line with central bank forecasts in Australia and with both economies cooling off rapidly analysts were convinced inflation had peaked and no more policy tightening was in store.

A US$20 retreat in oil prices from a record above US$147 a barrel earlier this month also helped brighten the inflation outlook.

“There is little doubt that the economy is flirting with recession, and, because of that, there is little doubt that inflation has peaked,” said Stephen Koukoulas, global head of economics at TD Securities in Australia.

In contrast, Malaysian inflation far outstripped market forecasts, fanning expectations the central bank will raise interest rates for the first time in more than two years when it meets on Friday.

“It’s much higher than even the most aggressive forecast in the market,’ said Irvin Seah, economist at DBS Bank in Singapore. “I’m certainly expecting the central bank to raise interest rates and I’m looking for a rise of 50 basis points.

But analysts said the spike was triggered by a hefty hike in government-controlled fuel prices as Malaysia was one of the last Asian nations to relax their grip on fuel costs in the face of soaring world crude prices.

CATCH-UP

Subsidies and price controls have helped authorities in Kuala Lumpur keep both inflation and its policy rate of 3.50 per cent among the lowest in Asia.

But while global price pressures may be waning and tight policies paying off for Australia, New Zealand or Singapore, Malaysia and others are now seen playing catch-up because they were slow to react to the inflation threat.

Economists say that even if headline inflation may start coming down after one-off fuel price rises, policymakers must be on guard because past hefty price increases can still translate into higher wage demands and a rise in inflation expectations.

On Wednesday, Philippine and Indonesian central bankers acknowledged they may have to act again, having both raised their key rates by 75 basis points this year.

“Given the current inflation environment, and given that there are still risks to the outlook, interest rate hikes cannot be ruled out at this point,” Philippine central bank Governor Amando Tetangco said.

Both countries have eased policies last year and both now have inflation running at more than 11 per cent, above their benchmark interest rates.

Indonesian central bank deputy governor Hartadi Sarwono said, however, gradual, moderate tightening should do the job.

“A gradual increase is enough looking at inflation. If inflation recedes, we will stop,” Sarwono said.

In South Korea, where inflation spiked to a near 10-year high of 5.5 per cent in June, the government and the central bank seem at loggerheads over what should be done to rein in prices.

The authorities have sought to contain imported inflation by intervening heavily to prop up the local currency.

The central bank has suggested a rate rise may be needed too.

But Finance Minister Kang Man-soo’s warnings that Asia’s fourth-largest economy was in its worst trouble since the 1997 Asian financial crisis and insistence rate rises would not help tame oil-fired inflation made markets scale back rate-rise bets.

South Korea is expected to report its weakest economic growth in 3-1/2 years on Friday, when it publishes second-quarter GDP data. - Reuters