Inflation on the retreat in Asia

Inflation is slowing across Asia, giving policy makers in the region scope to reduce borrowing costs to protect their economies from a global slump.

South Korean consumer prices rose in October at the weakest pace in six months, the statistics office said yesterday in Gwacheon. Inflation also slowed more than economists expected in Indonesia and Thailand last month.

Asian central banks are switching their focus from fighting inflation to bolstering growth as the global financial crisis that has pummelled the US and Europe threatens to engulf the region's export-dependent economies. The Reserve Bank of Australia and the Bank of Korea are both expected to cut interest rates further this week, according to Bloomberg surveys.

"Central banks have room to reduce rates significantly," said Ramya Suryanarayanan, an economist at DBS Bank in Singapore. "Commodities prices are falling and demand is weakening. You will see inflation declining pretty much everywhere."

Sliding fuel and commodity prices have helped ease inflation across Asia. Crude oil has fallen 53 per cent from an all-time high of US$147.27 a barrel on July 11 and dropped 27 per cent in the past year. Copper and wheat have tumbled more than 50 per cent from records this year.

Consumer prices in South Korea rose 4.8 per cent last month from a year earlier, moderating from a 5.1 per cent gain in September and matching the median estimate in a Bloomberg survey. Prices fell 0.1 per cent in October from the previous month.

The Bank of Korea last week lowered borrowing costs by a record amount, the second reduction in less than three weeks, in an emergency move to restore confidence and revive the economy. Governor Lee Seong Tae hinted at further rate cuts.

Easing inflation in Indonesia and Thailand may give policymakers in Southeast Asia's two largest economies room to pause after raising borrowing costs earlier this year amid soaring consumer prices.

Indonesia's inflation rate declined to 11.8 per cent in October from 12.1 per cent in September, the Central Statistics Bureau said in Jakarta yesterday.

That may give Bank Indonesia room to keep its benchmark interest rate unchanged at 9.5 per cent after six consecutive increases in the measure, said economists including Enrico Tanuwidjaja from Oversea-Chinese Banking Corp in Singapore.

Consumer prices in Thailand rose 3.9 per cent in October from a year earlier, the lowest pace in 10 months and below the 4.9 per cent median estimate in a Bloomberg News survey.

Bank of Thailand policy makers, who next meet on December 3, kept the benchmark one-day bond repurchase rate at a 16-month high of 3.75 per cent on October 8 after raising it 50 basis points in two meetings since July.

"Many economies around the region have started to cut interest rates to support domestic demand and that's the right thing to do," David Burton, head of the International Monetary Fund's Asia-Pacific department, said in an interview with Bloomberg Television in Hong Kong. "Because inflation is coming off, there is room to do more on monetary policy."

China and India, the world's fastest expanding major economies, have cut borrowing costs in the past week.

The Reserve Bank of India on Saturday lowered its benchmark interest rate for the second time in two weeks, and for the first time in 11 years reduced the amount of money lenders are required to keep in government bonds.

The Bank of Japan also reduced its key overnight lending rate by 20 basis points to 0.3 per cent last Friday. Taiwan and Hong Kong also trimmed their benchmark rates last week.


Source: Business Times Online
Date: 04/11/2008