Business | Banking
Asian central banks cautious on raising rates
Fall in export demand and soaring oil prices hit economies as lenders focus on providing a cushion for growth.
- Reuters
- Published: 00:08 June 5, 2008
Singapore: Central banks across Asia are taking a half-hearted approach to tackling inflation and, even with interest rate increases finally on the agenda, many appear unwilling to slam the brakes on a price spiral.
Central bankers had good reason to keep their powder dry. The US credit crisis last year triggered a global economic slowdown and dented demand in Asia's biggest export market, while a doubling of oil prices in 12 months hurt companies.
Worried about the impact on economies, central banks focused on providing a cushion for growth, encouraged in some cases by governments fearing a backlash over job losses. As recently as last month half the analysts polled by Reuters expected the Bank of Korea to cave in to political pressure and cut interest rates.
Now it appears the central banks may have been caught off guard. Inflation is accelerating across Asia and governments from Taipei to New Delhi are raising subsidised fuel prices, which in turn threatens to push up wages and other costs. "Central banks have underestimated the extent of the supply shock earlier this year," said Nicholas Bibby, senior regional economist at Barclays Capital in Singapore.
Second-round effects
"In some countries, we are starting to see the second-round effects coming through from the high energy prices. We see some demand-side pressures, this is what the central banks are concerned about," he said.
Annual inflation is running at more than 25 per cent in Vietnam, nearly 20 per cent in Sri Lanka, more than 17 per cent in Pakistan and just over 10 per cent in Indonesia. Headline inflation ranges from nearly 7 per cent to 10 per cent in Thailand, China, India, Singapore and the Philippines.
In China, India, Indonesia, the Philippines, Thailand, Taiwan, Vietnam, the rate of inflation has overtaken interest rates, meaning it makes more sense to borrow money than keeping it in a bank deposit. Such negative interest rates fuel inflation by encouraging investment in property and other assets.
To complicate matters even further for central banks, neither the US slowdown or its impact on Asia has been as dramatic as initially expected.
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