Climbing prices put S-E Asian central banks on alert

A National Food Authority warehouse stacked with bags of rice in Bicutan, in the Philippines. The South-east Asian country, which showed the fastest economic expansion last year, may be the first in the region to tighten monetary policy this year, sa
A National Food Authority warehouse stacked with bags of rice in Bicutan, in the Philippines. The South-east Asian country, which showed the fastest economic expansion last year, may be the first in the region to tighten monetary policy this year, said economists surveyed by Bloomberg. Inflation is running at the fastest pace in two years.PHOTO: REUTERS

They're watching for signs of rising fuel costs spreading more broadly to prices in economy

KUALA LUMPUR • After more than a year of disinflation, price pressures are quickly mounting across South-east Asia as rising fuel costs put central banks on watch after years of policy easing.

In Malaysia, consumer prices rose at the fastest pace in almost a year in January, and economists saw that as reason for its central bank to decide to keep its key rate unchanged yesterday. From Singapore to Thailand, central banks are braced for faster inflation.

The recent spike has been mainly caused by oil prices, which have surged 25 per cent in the past six months. 

In a region where countries like Indonesia have been prone to high inflation in the past, and currencies are vulnerable - notably in Malaysia - central banks will need to monitor closely for any signs that rising fuel costs are spreading more broadly to prices in the economy. 

"The obvious risk is that complacency leads central banks to miss inflation pressure spreading to the spending-driven CPI components, forcing more aggressive rate hikes and greater growth slowdowns down the road," said Mr Timothy Condon, head of Asian research at ING Groep in Singapore.

POTENTIAL RISK

The obvious risk is that complacency leads central banks

to miss inflation pressure spreading to the spending-driven CPI components, forcing more aggressive rate hikes and greater growth slowdowns down the road.

MR TIMOTHY CONDON, head of Asian research at ING Groep in Singapore.

The pickup in inflation is not unique to South-east Asia as higher commodity prices drive up costs across Asia. China's factory prices have snapped years of deflation, with some analysts saying this is the hidden side of the global reflation trade.

For now, core measures of inflation in South-east Asia - which exclude volatile items such as energy and food costs - remain contained, taking the pressure off central banks to take immediate action to tighten policy.

In Malaysia, inflation will probably accelerate to 4 per cent in February, and average 3.5 per cent this year, up from a previous forecast of 2.5 per cent, according to Mr Mohamed Faiz Nagutha, an economist with Merrill Lynch Asia Pacific.

The Philippines, which had the fastest economic expansion in South-east Asia last year, may be the first country in the region to tighten monetary policy this year, according to economists surveyed by Bloomberg. Inflation is running at the fastest pace in two years.

"The Philippines has been seeing strong growth, so greater scope for inflation pass-through," said Mr Khoon Goh, the head of Asia research at Australia & New Zealand Banking Group.

In Singapore, consumer prices rose for a second month in January after almost two years of declines, while a government report on Wednesday showed a surprise slowdown in Thailand's inflation in February to 1.4 percent.

Aside from the Philippines, most of the economies in South-east Asia are growing below par, which supports calls for more policy easing.

Growth in Malaysia slowed to 4.2 per cent last year from 5 per cent in 2015, while Indonesia's economy expanded 5 per cent last year, below the government's goal of 7 per cent.

"The inflation outlook across the region is one that things will start picking up," said Mr Rahul Bajoria, an economist at Barclays in Singapore. "What we need to watch is a second-round impact of higher fuel inflation and the core inflation measures," he said. "If that was to start picking up, then I think we'll see central banks becoming a bit more cautious about the inflation outlook."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 03, 2017, with the headline 'Climbing prices put S-E Asian central banks on alert'. Print Edition | Subscribe