Asia central banks juggling risks find solace in food

ASIAN central bankers grappling with wobbly markets, higher energy costs and simmering trade tensions are getting relief from an old foe: food prices.

In a region vulnerable to wild price swings, food inflation has been largely contained, thanks in part to favorable weather and increased investment in production, storage and distribution.

For developing nations like India and China — where food makes up a higher share of spending and consumer price indexes — that’s helped keep a lid on inflation and left them better placed to grapple with the strains caused by US monetary tightening.

Less clear is how long the calm will hold.

“Food price inflation across Asia is subdued, but I don’t think central banks can afford to nod off,” said Sumiter Singh Broca, a Bangkok- based official at the Food and Agriculture Organization (FAO) of the United Nations.

Malaysia, the Philippines, Indonesia and India have already raised interest rates this year in a bid to support weakening currencies amid a sell-off in emerging markets and to get ahead of inflation pressures linked to rising fuel costs.

Economists at Citigroup Inc. led by Johanna Chua note that although volatility in Asia’s food prices has receded, the oil rally and a cyclical bottoming of food inflation should generate higher risks — especially for fuel-sensitive economies like Thailand and Indonesia.

Food has a weighting in Asia’s consumer price index that’s more than three to four times larger than fuel and energy, according to Citigroup.

Shikha Jha, a Manila- based economist at the Asian Development Bank, warns that rising oil prices will push up fuel and transportation costs in the region. “Energy and food prices are moving together very closely,” she said, adding that risks associated with ongoing trade tensions between the United States and China also bear watching.

Food costs across Asia can vary considerably, both by item and by country, making an overall reading hard to gauge. Globally, prices are already inching higher. The FAO’s Food Price Index averaged 176.2 points in May to hit its highest level since October. The Cereal Price Index was almost 17% higher than a year ago.

Sizable purchases by Southeast Asian buyers kept rice prices firm, according to the FAO. Thai rice prices are up more than seven percent so far this year and the Philippines has shown strong demand for imported rice.

Yet for now at least, the overall picture in Asia is largely benign.

“Weather has been rather favorable, which means not so much disruption on food supply coming

from mother nature, which has traditionally been disruptive for countries such as India, the Philippines and Vietnam,” said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis Asia Ltd. in Hong Kong.

But unfavorable base effects, higher oil prices, weather risks and weaker currencies mean the cost of imported goods are likely to pick up, she said.