Bloomberg News

Asia Inflation Risk May Check Easing

April 11, 2012

Shoppers buy vegetables and spices at a market in Jakarta, Indonesia. Photographer: Dimas Ardian/Bloomberg

Shoppers buy vegetables and spices at a market in Jakarta, Indonesia. Photographer: Dimas Ardian/Bloomberg

Asian nations from South Korea to Singapore may refrain from monetary easing this week as rising oil prices add to inflation risks, even as pressure mounts on Japan to add stimulus and China grapples with slowing expansion.

Indonesia (IDBIRATE) will keep interest rates unchanged for a second month tomorrow, and South Korea and Pakistan will follow a day later, according to Bloomberg News surveys. Singapore, which uses its exchange rate to manage inflation, is forecast by economists to maintain its policy stance on April 13, when the government is predicted to report a rebound in growth.

Crude oil has risen 18 percent in the past six months, forcing Asian governments to raise fuel prices and limiting policy options for central banks in the world’s fastest growing region. Developing Asia can refrain from further monetary and fiscal stimulus because expansion will remain robust, while spikes in energy costs can revive the threat of inflation, the Asian Development Bank said in a report today.

“Economic momentum is steadily improving, so there is no scope for further monetary accommodation,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore. “The focus of policy is to anchor inflation expectations.”

The MSCI Asia Pacific Index (MXAP) has risen about 8 percent this year on signs the U.S. is recovering and as Europe’s turmoil abated with Greece’s second bailout package. The Bank of Japan yesterday resisted calls from lawmakers to expand monetary easing and counter deflation.

Concerns Revived

Still, the regional stock index fell this week as Spanish bonds trading closer to levels that prompted Greece, Ireland and Portugal to seek European bailouts revived concern that Europe’s debt crisis will worsen.

The Bank of Japan kept its key rate between zero and 0.1 percent and left its 30 trillion yen ($371 billion) asset- purchase fund and 35 trillion yen credit-lending program unchanged yesterday.

Takeshi Miyazaki, a Democratic Party of Japan lawmaker and a leader of the ruling party’s anti-deflation group, called on the BOJ to do more later this month, saying yesterday the central bank should pursue “bold and large-scale monetary easing.”

Japan’s machinery orders exceeded all economists’ estimates in February, signaling gains in capital spending that may help to sustain a recovery in the world’s third-biggest economy, a Cabinet Office report showed in Tokyo today. Bookings increased 4.8 percent, the most since November.

Australian Loans

Elsewhere, Australian home-loan approvals fell for a second month on the fastest exodus of first-home buyers in a decade, a statistics bureau report showed in Sydney today. A private survey showed consumer confidence declined to an eight-month low. In neighboring New Zealand, business confidence rose in the first quarter while companies had three months of weak trading, a report by the New Zealand Institute of Economic Research Inc. showed.

In Europe, U.K. retail sales rose for the first time in three months in March as warm weather boosted demand for clothing and outdoor gear, the British Retail Consortium said. Hungarian inflation probably slowed to 5.5 percent in March, according to the median estimate in a Bloomberg survey ahead of a report due today. Russia is due to release weekly price data, and Norway and Spain will release industrial production data for February.

A U.S. report on mortgage applications is due today from the Mortgage Bankers Association, a Washington-based trade group. The country’s import prices are estimated to rise 0.8 percent in March from the previous month, according to the median in a Bloomberg survey. The Federal Reserve will release its Beige Book survey.

Costlier Fuel

Oil has gained on concern tension with Iran will disrupt global supplies. China, the world’s largest oil consumer after the U.S., increased gasoline and diesel prices for the second time in less than six weeks on March 20. Its inflation accelerated more than forecast in March, signaling policy makers may exercise caution in adding stimulus to boost growth. The Philippines, Taiwan and Vietnam have also raised fuel prices this year.

“There is no clear case for short-term policy responses, but if inflationary pressures build up again and capital inflows resume, there may be a need to readjust monetary policy to maintain price stability,” Changyong Rhee, ADB chief economist, said in a statement.

Indonesia’s central bank kept its benchmark rate unchanged at 5.75 percent last month after cutting borrowing costs in February, as a government plan to raise fuel prices revived inflation risk. Inflation accelerated in March for the first time in seven months.

Indonesian Bid

All 20 economists surveyed by Bloomberg News expect Southeast Asia’s largest economy to hold its key rate tomorrow.

Lawmakers in March rejected the government’s bid for an immediate 33 percent increase in the price of subsidized fuel, instead giving it the power to raise prices only if the Indonesia Crude Price exceeds the budget assumption of $105 a barrel by an average 15 percent over a six-month period. The six-month average was 11 percent above the budget assumption as of March 31, according to Bloomberg calculations.

“Bank Indonesia has already signaled a shift in their bias at the last policy meeting and with inflation risks on the horizon, there is a strong case for them to maintain the current stance,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “Having moved ahead of the rest of the region in the easing cycle, Southeast Asia is probably already done cutting interest rates this year.”

Singapore Stance

Singapore’s central bank will hold the current rate of the local dollar’s advance and refrain from altering its trading band, according to analysts at 19 of 21 financial companies surveyed by Bloomberg News. Two said there is a chance the central bank will leave it unchanged or increase the band’s slope to levels prior to its last review in October.

The Singapore economy expanded an annualized 6.8 percent last quarter from the previous three-month period, when it contracted 2.5 percent, according to the median estimate of 12 economists surveyed by Bloomberg News.

South Korea, which is holding parliamentary elections today, grew the least in two years in the last three months of 2011, and the economy will return to a recovery path this quarter, Finance Minister Bahk Jae Wan said April 4.

The Bank of Korea will keep the benchmark seven-day repurchase rate unchanged at 3.25 percent for a 10th month when policy makers meet, according to all 13 economists surveyed by Bloomberg News. The central bank aims to keep inflation at the midpoint of a range of between 2 percent and 4 percent over the medium term.

Vietnam Cuts

Pakistan’s central bank will keep the discount rate at 12 percent for a third meeting, according to all 11 economists surveyed by Bloomberg. The country faces inflation exceeding 10 percent, the fastest in Asia after Vietnam. The price gains, the lingering impact of floods in 2010 and 2011 and an insurgency near the Afghan border are crimping expansion in the $200 billion economy.

Vietnam is one of the few countries in the region still lowering interest rates. The Southeast Asian nation cut its borrowing costs for the second time in less than a month this week as easing inflation gave policy makers scope to bolster an economy that’s growing at the slowest pace since 2009. The reductions are effective today.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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