Asian inflation could hit highs seen elsewhere; central banks to step up in H2 2022: analysts

INFLATION in Asia has largely trailed the recent highs seen in other markets, but could climb to similar levels this year on surging commodity prices, prompting firmer central bank action, some analysts warn.

Emerging markets are expected to face mounting inflation, and “for many of these, inflation rates will rise to, or even exceed those of the West, reflecting shortages of food, gas, metals, and oil”, said Rob Carnell, regional head of research for the Asia-Pacific at ING.

Asian central banks are expected to tighten the screws accordingly, as consumer costs – earlier dampened by pandemic shutdowns and government subsidies – rise on food and fuel expense spikes.

Analyst Priyanka Kishore, who heads coverage of India and South-east Asia at Oxford Economics, told The Business Times that she would not rule out inflation prints “in the region of 6 per cent to 7 per cent in the coming months” in Asian economies such as India and Thailand.

Prices will rise “into the early third quarter for most of Asia” and recede in the second quarter of 2023, said Kishore, who forecast a peak above 5 per cent in Asia outside of China. She added: “But the downtrend will be slow initially, due to gradual resolution of supply-side issues.”

But other economists still see Asia managing to keep inflation below the heights reached by other regions. Maybank economist Lee Ju Ye believes that a moderation in supply-chain disruptions will keep a lid on commodity prices later in the year, so “we don’t expect Asean inflation to spike to similar levels as advanced economies”.

Inflation in the Asean-6 economies – which was about 3 per cent in the first quarter – should peak at 4.5 per cent in the third quarter, then ease to 4.2 per cent, she said.

The Asian Development Bank’s director of macroeconomic research Abdul Abiad also told BT that “we do not expect inflation to spike to similar levels as in the US and Europe”, owing to smaller increases in the price of rice, less severe supply disruptions, and greater economic slack.

But “it’s also important to note significant differences within the region”, he added, highlighting struggles with double-digit inflation in Sri Lanka and Pakistan, where the impact of higher energy and commodity prices was worsened by currency depreciation.

Similarly, Natixis Corporate and Investment Bank senior economist Trinh Nguyen noted that the extent of inflation will depend on “the different economic business cycle and demand conditions” in each country. For example, India is grappling with both demand and supply shocks, while supply-side inflationary pressures in China are dampened by weak domestic demand, she said.

Still, the analyst consensus is for tougher central bank action in the second half of 2022, especially in the economies already registering relatively higher levels of inflation now.

Said Kishore: “While governments may continue to lend a helping hand, the fiscal space is limited following post-pandemic spending, especially in emerging Asia. Hence, the central banks will have to take on the baton to control inflation as and when necessary.”

Granted, some countries such as Thailand and Indonesia may raise rates only as a last resort, as they are trying to protect demand and economic growth, Nguyen suggested.

Yet Lee told BT that energy costs will push up import bills, worsen current account balances, and hit consumer confidence for energy importers like Thailand, the Philippines and Vietnam.

As such, “persistently elevated costs and greater pass-through to core inflation components, as well as a more aggressive tightening by the US Fed, may force the central banks to hike earlier”, she said.

Dr Abiad also noted that aggressive US Fed action tends to prompt capital outflows from countries such as Japan where rates are not expected to rise as strongly.

The US Federal Reserve increased its benchmark rate by 0.5 point in May. And ING’s Carnell added that the Monetary Authority of Singapore (MAS) “is not an outlier anymore” in Asia, as India, South Korea and Australia have all raised rates, and the Philippines “will likely soon follow”.

The MAS tightened policy thrice in 6 months, including an off-cycle move in January. Meanwhile, Bank Negara Malaysia caught observers off guard when it increased a key rate by 0.25 point on May 11.

Market chatter is also speculating about rate increases from the Bangko Sentral ng Pilipinas, after the Philippines posted better-than-expected first-quarter economic growth on May 12.

“More rate rises and reserve requirement ratios hikes and exchange rate adjustments look probable,” Carnell said. Such ratios are rules on how much cash commercial banks must have in hand.

Moody’s Investors Service analysts said in a report on May 10 that credible central bank action could “keep inflation anchored”, but added: “Monetary policy actions still take time to be transmitted through the system, and inflation this year will be materially above central bank targets.”