Asian nations including India and Indonesia face elevated price pressures that will constrain monetary easing even as the growth outlook for the region dims, the International Monetary Fund said.
Emerging Asian economies may expand 6.8 percent in 2012, after growing 7.3 percent last year, the fund said in its World Economic Outlook report today. The region is experiencing a “soft landing,” which will probably continue, it said.
Crude oil has risen 20 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. While India cut interest rates by more than economists forecast today and Australia signaled slower inflation would increase prospects for its first reduction this year, policy makers elsewhere are holding borrowing costs steady to contain price pressures.
“Although monetary tightening has been appropriately paused in many Asian economies, and cautiously reversed in some, room for further easing is constrained in economies where underlying inflation pressures remain,” including India, Indonesia, Korea, and in countries that are still working through previous credit expansion, such as China, the IMF said.
While headline inflation in emerging Asia as a whole is slowing and expected to continue easing, the IMF said price gains will “stay elevated” in India and quicken in Indonesia. Inflation in emerging Asia will slow to 4.7 percent this year from 6.1 percent in 2011, it said.
India’s inflation may be 8.2 percent this year, compared with 8.6 percent in 2011, the IMF said. The central bank slashed its benchmark rate by half a percentage point today, seeking to bolster growth with the first reduction since 2009. Inflation, which remains the fastest among the biggest emerging economies, might limit the room for further cuts, the central bank said.
Bank Indonesia is shifting its focus to maintaining price expectations from supporting growth, Perry Warjiyo, director of economic research and monetary policy, said today. Inflation accelerated for the first time in seven months in March and the central bank left its key rate unchanged in April for a second meeting after a reduction in February.
Indonesian consumer prices may climb 6.2 percent in 2012, compared with 5.4 percent last year, the IMF said.
Threats to Asia’s growth include an escalation of Europe’s debt crisis, a “sharp rise” in global risk aversion and Middle East tensions that may cause oil prices to surge, the IMF said.
Euro Area Risks
“Policy in the region needs to be set with an eye toward these risks,” the IMF said. An escalation of the euro area crisis could lower emerging Asia’s output, while “a sharp rise in global risk aversion and uncertainty would also produce significant spillovers.”
Asian economies with low levels of public debt can slow the pace of fiscal consolidation to counter the downside risks, while improving finances remains a priority in India and Japan, the IMF said.
“In India, while part of the expected slowdown to 7 percent in 2012 is a cyclical response to higher interest rates and lower external demand, policy uncertainty and supply bottlenecks are playing a role and will need to be tackled in the near term to ensure that potential growth does not decline,” the IMF said.
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