Inflation spike puts SEA central bankers on watch

After more than a year of disinflation, price pressures are quickly mounting across Southeast Asia (SEA) as fuel costs rise, putting central banks on watch after years of policy easing.

In Malaysia, consumer prices rose at the fastest pace in almost a year in January and economists see that as closing the door on another interest-rate cut at Thursday’s meeting even though the economy could do with more stimulus. From Singapore to Thailand, central banks are bracing for faster inflation.

The recent spike has been mainly caused by oil prices, which have surged 25 percent in the past six months. In a region where countries like Indonesia have been prone to high inflation in the past, and currencies are vulnerable – notably in Malaysia – central banks will need to monitor closely for any signs that rising fuel costs are spreading more broadly to prices in the economy.

“The obvious risk is that complacency leads central banks to miss inflation pressure spreading to the spendingdriven CPI components, forcing more aggressive rate hikes and greater growth slowdowns down the road,” said Timothy Condon, head of Asian research at ING Groep NV in Singapore.

The pick-up in inflation isn’t unique to Southeast Asia as higher commodity prices drive up costs across Asia. China’s factory prices have snapped years of deflation, with some analysts saying this is the hidden side of the global reflation trade.

For now, core measures of inflation in Southeast Asia – which exclude volatile items such as energy and food costs – remain contained, taking the pressure off central banks to take immediate action to tighten policy. In Malaysia, where inflation reached 3.2 percent in January, the core measure was at 2.3 percent. The government’s projection is for headline inflation to average 2 percent to 3 percent this year.

“We’ve had a big swing from really depressed numbers,” said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney. “Until there’s evidence that core inflation is on the rise and wages up with it, I don’t think we’re going to have any inflation dynamic going on in the region.”

Malaysia’s resolve will be tested on Thursday, with all but one of the 17 economists surveyed by Bloomberg predicting Bank Negara Malaysia will keep its policy rate on hold at 3 percent. ING Bank NV is forecasting a 25 basis-point reduction.

Inflation will probably accelerate to 4 percent in February, and average 3.5 percent this year, up from a previous forecast of 2.5 percent, according to Mohamed Faiz Nagutha, an economist with Merrill Lynch Asia Pacific Ltd. in Hong Kong. After surprising the market with an interest-rate cut in July last year, Mohamed Faiz is predicting the central bank will be on hold for the rest of the year.

“We do not expect BNM to react to these spikes in headline CPI and rather focus on measures of core inflation,” he said.

The Philippines, which had the fastest economic expansion in Southeast Asia last year, may be the first country in the region to tighten monetary policy this year, according to economists surveyed by Bloomberg. Inflation is running at the fastest pace in two years and the currency is the worst performer in Asia this year, down 1.1 percent against the dollar.

“The Philippines has been seeing strong growth, so greater scope for inflation pass-through,” said Khoon Goh, the Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. (Bloomberg)