Growth vs inflation trade-off gets tougher in Asia

Wednesday, 19 January 2011 00:01 - - {{hitsCtrl.values.hits}}

BEIJING: Asian policymakers presiding over a sturdy economic recovery can be forgiven if they felt smug watching Europe’s debt crisis and America’s budget woes mount.

But fast-rising food and oil prices have shattered any complacency, complicating the eternal trade-off between sustaining growth and keeping a lid on prices.

The central banks of South Korea and Thailand both cited the threat from record food price inflation as a reason for raising interest rates last week.

“Unlike previous episodes of spiking raw material costs, there is now a greater realisation across Asia, and apparently also in Korea, that such bursts of inflation cannot be shrugged off as temporary and need to be addressed with a more pro-active monetary policy stance,” said Song-yi Kim, an economist at HSBC .

China , which on Friday ordered banks to hold more of their deposits in reserve, is also waging a vigorous campaign to keep inflation expectations anchored in the face of spiralling food costs.

Hans Timmer, director of development prospects at the World Bank, said it was in the interest of countries that are doing well to act promptly to prevent their economies from bubbling over.

“For that reason it is very logical that many governments in developing East Asia are very concerned now about the first signs of inflation and are asking themselves what they should do about it,” Timmer said.

Yet what is striking is that monetary policy across the region is far from tight.

The cost of money, which was slashed to emergency levels as the global economy tottered in 2008, is still well below the rate of inflation in most countries -- and below historical averages.

This is partly because Asia is worried that raising interest rates will attract unwanted inflows of cash minted by Western central banks. It is also due to the ingrained instinct of politicians to put growth before price stability.

“In general, countries are a bit behind the curve. They have not tightened enough and they should be pre-emptive in order to try to sustain the longevity of the cycle and not let inflation get in the way,” said Bill Belchere, global economist for Mirae Asset Securities in Hong Kong.