International | Apr 11 2006
The last few years has seen an unusual combination of conditions for Asian economies, as growth has been strong while inflation has remained low. In the view of the economics team at ANZ Bank this is now changing, the uptick in inflation over the past few months a sign of things to come.
In the bank’s view, the recent gains in inflation in the region have been a reflection of both ongoing strength in commodity prices and what seems to be the end of deflation in Japan.
The bank points out higher energy prices have had an impact because the economic growth in the region has led to increased demand for energy, while increased government spending on infrastructure projects has meant more demand for both energy and input materials, particularly base metals.
At the same time, the strengthening of the Japanese economy leads the bank to suggest the likely outcome is increased inflationary pressures in the region, as a rise in its domestic demand has implications for the region as a whole given the size of its economy.
The bank notes there has already been a solid increase in the inflation rate in Asia ex-Japan and China, from less than 2.5% in 2003 to above 6% currently. One difficulty in the bank’s view is determining what is a natural inflation rate for the region, though it notes the current rate is at least close to the levels seen in the 1990s.
Assuming there is a continuation of this trend towards higher inflation, the bank suggests there may be pressure in coming months to push interest rates higher to keep inflation in check. This is particularly the case given Asia generally is still running a relatively easy monetary policy, with rates below levels elsewhere in the world.
While the general trend is for slightly higher inflation rates, the bank notes it won’t be a consistent move higher across the region as different economies are in different positions. As an example, it suggests Indonesia should enjoy a fall in both inflation and interest rates following a recent period of very high inflation resulting from higher fuel prices, while Thailand is forecast to face stronger inflationary pressures than consensus estimates currently indicate.
