Asian governments and central banks have belatedly woken up to the menace of rising inflation. The Indonesian and Philippine central banks have both raised their benchmark interest rates by 25 basis points, but it is not enough, and policymakers elsewhere in Asia must show greater vigour.
A quarter of a percentage point on interest rates will still leave monetary policy too loose in Asia’s current economic climate.Indonesia’s rate rise to 8.5 per cent followed a similar increase in May, but that was the first upward move since 2005, and inflation is already above 10 per cent. Manila’s rise to 5.25 per cent was the first in three years, and inflation is at a nine-year high of 9.6 per cent.
The widespread emergence in the region of such negative real interest rates – UBS says that in Asia excluding Japan the gap averages 1.7 per cent, while according to Goldman Sachs, Singapore and China each have negative real rates of 5 per cent or more – suggests that Asian policymakers need to
adopt far more radical measures to combat inflation. In most cases that will mean allowing currency appreciation against the dollar and so reducing the need to import the loose monetary policy of the US.
The battle is important to the developed world, because China and the rest of Asia are no longer exporting benign deflation through their trade in manufactured goods. But it is also vital for Asia itself. Inflation in
some countries is downright alarming – in Vietnam inflation rose in May to 25.2 per cent, its highest since 1992 – and although the headline number for the Chinese consumer price index is likely to dip in the
near term, Asian central banks have lost a lot of credibility as inflation fighters.
Food and oil prices remain high, albeit off their peaks, and several governments have been forced to abandon or reduce the fiscally unsustainable fuel subsidies that have helped artificially to contain inflation in the past. Unless the authorities show some will, a vicious circle of high inflationary expectations, rising wages, and so higher prices will quickly take hold.
Asia’s reluctance to tackle inflation is surprising, given the obvious dangers to economic stability, the political risks associated with rising prices in countries such as India and the cushion that exists in the form of robust economic growth. Inflation must be fought, even if it means sacrificing ultra-fast economic growth for a limited time and deflating asset bubbles further. Neither the supercharged growth nor the bubbles are indefinitely sustainable anyway.
