Accelerating inflation from Singapore to Vietnam is set to spur higher interest rates and currency gains in Asian economies.
India's food inflation accelerated for the first time in three weeks to 11.49 percent in the week ended Feb. 12, a report showed Thursday. Singapore's inflation rate rose to a two-year high of 5.5 percent in January, while prices in Malaysia climbed at the fastest pace since mid-2009, reports on Wednesday showed. Vietnam's prices gained the most in 24 months in February.
China, India, Indonesia, South Korea, Thailand and Vietnam all increased borrowing costs this year, widening the gap with the US Federal Reserve's near-zero benchmark rate, as rising oil and commodity prices threaten to fuel inflation. A surge in capital inflows into the region is also contributing to higher asset prices and stronger currencies, Standard & Poor's said.
"Asian central banks will have to stay tight or continue tightening in the coming months," said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. Rising oil prices are "the next major threat, following on the heels of food prices."
A 10 percent increase in global oil prices boosts inflation by about 10 to 40 basis points across Asian countries, with the lower-income countries seeing a larger impact, Chua said. While currency strength has helped to partly offset inflation pressures, this option may become less tenable if growth decelerates more significantly, he said.
$100 a barrel
Oil prices reached above $100 a barrel in New York, climbing to the highest level in more than two years as intensifying violence in Libya stoked concern that supplies will be disrupted should the turmoil spread to other crude-producing countries in the Middle East and North Africa.
Asian currencies have climbed in the past year, partly on speculation central banks will raise interest rates as surging oil prices threaten to fuel inflation. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region's 10 most-active currencies, added 4.4 percent in the past 12 months.
"Asia is the region where interest-rate hikes are expected in some countries," said Yuji Kameoka, chief currency strategist at Daiwa Institute of Research Ltd. in Tokyo. "That means regional currencies are also on a trend of appreciation. The region's economy remains quite solid."
Gains in commodity prices may hurt Asia's growth should it force governments to tighten domestic policies to control inflation, Singapore Finance Minister Tharman Shanmugaratnam said Feb. 18.
"Food and other commodity prices have climbed sharply, because supply has been affected by harsh weather conditions while demand continues to grow in China and elsewhere," Shanmugaratnam said. "The political uncertainties in the Middle East have also driven oil prices up. There will not be early relief from these inflationary pressures."
In India, an index measuring wholesale prices of agricultural products including lentils, rice and vegetables rose 11.49 percent in the week ended Feb. 12 from a year earlier, the commerce ministry said in a statement in New Delhi Thursday. It gained 11.05 percent the previous week.
India's stocks tumbled after the report, dragging the benchmark index down by the most since August 2009. Rising food costs have sparked protests and prompted the Indian central bank to raise interest rates the most in Asia. The Reserve Bank of India has increased its benchmark repurchase rate seven times in the past year to 6.5 percent.
Vietnam's consumer prices rose 12.31 percent in February from a year earlier, according to figures released by the General Statistics Office in Hanoi Wednesday. The central bank raised its reverse repurchase rate on Feb. 22, the second increase in borrowing costs in less than a week.
Prime Minister Nguyen Tan Dung has approved a plan to tackle inflation that includes a lower lending-growth target and "tight" monetary policy. He reduced the credit-growth target to below 20 percent from 23 percent for 2011, according to a document presented at a meeting between the premier and policy makers in Hanoi today.
Dung also instructed ministries to narrow the budget deficit to less than 5 percent of gross domestic product this year, and ordered the central bank to pursue a "cautious and tight" monetary policy.
Hong Kong risk
Vietnam is under pressure to curb inflation that is poised to accelerate as electricity prices rise and four currency devaluations in 15 months spur import costs. It raised its refinancing rate by 2 percentage points to 11 percent last week.
In Hong Kong Wednesday, Financial Secretary John Tsang named inflation and the risk of a property bubble as the "two main challenges" for the city in the coming year. The government will increase the supply of land, and sell inflation- linked bonds to help residents cope with rising prices, Tsang said. The city's currency peg to the dollar prevents it from using interest rates to contain price pressures.
Some Asian economies have imposed capital controls to curb inflows and such measures have "limited impact" on a nation's creditworthiness, S&P said in a report yesterday.
"In most cases, these policies aimed to prevent instability arising from excess liquidity, asset-price bubbles, or a potential disorderly future withdrawal of invested funds," said Kim Eng Tan, a credit analyst at S&P in Singapore.
In Singapore, where the central bank uses the currency to manage price gains, consumer prices rose 5.5 percent in January from a year earlier, after climbing 4.6 percent in December, the government said yesterday.
Wage pressures may also increase in Singapore as the government this month said companies will be required to increase contributions into employees' pension funds and pay more to hire foreign workers.
Economists from Standard Chartered Plc to Citigroup Inc. are predicting the Monetary Authority of Singapore will revalue the currency or let it appreciate faster at the policy review in April. The central bank revalued the currency in April 2010 and said in October it would steepen and widen the currency's trading band while continuing to seek a "modest and gradual appreciation."
Consumer prices may climb 3 percent to 4 percent this year, up from a previous forecast of 2 percent to 3 percent, the Singapore government said Feb. 17.
Malaysia's inflation rate rose to 2.4 percent in January, the statistics department said yesterday.
Bank Negara Malaysia's benchmark interest rate of 2.75 percent has been left unchanged at the past three meetings, most recently in January when the central bank signaled it may use other monetary policy tools to manage excess cash that's building up in the financial system.