Manila/Hong Kong: A jump in crude oil costs in excess of 20% in the past two weeks is escalating the danger of inflation in Asia, where central banks are already grappling with consumer price pressures fuelled by job and spending gains.
The Bank of Thailand and Bank of Korea will each raise key interest rates this week by a quarter percentage point, median estimates in Bloomberg surveys of economists show. Malaysia may also be approaching the end of its pause in boosting borrowing costs, as four of 17 analysts polled see a 11 March move, the highest such share since the last increase, in July.
With the US Federal Reserve refraining from any signal that it’s ready to lift its benchmark from almost zero, currencies from South Korea’s won to Malaysia’s ringgit are set to gain compared with the dollar this year, forecasts compiled by Bloomberg show. The region’s economies are strong enough to withstand the impact of faster inflation, the Asian Development Bank said last week.
“The region is particularly prone to food and oil price shocks as a greater percentage of household income is spent on food and transportation,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte. “At the same time, we’re very bullish on Asian currencies. They’ll continue to rise against the dollar this year, supported by rising interest rates.”
Singapore, which uses its exchange rate as the main monetary policy tool, has let its currency climb 10.5% versus the dollar in the past 12 months. Malaysia, the first Asian nation to raise rates in 2010, has seen the ringgit gain 10.1%. The won has by contrast risen less than 2%, as South Korean officials sought to counter speculative capital inflows.
reached a 29-month high on Monday as violence in Libya renewed concern that Middle East supply disruptions will worsen. Crude for April delivery was $104.85 at 1.42pm Singapore time. On Monday, the contract settled at $105.44.
Diminished resistance to currency gains in China may have a knock-on effect across Asia as the continent’s biggest economy also seeks to contain price pressures. People’s Bank of China governor Zhou Xiaochuan said last month in Paris that his nation may use means including rates and currency to curb increases in food and home prices.
McDonald’s Corp., the world’s largest restaurant company, may raise prices at its China outlets in the second half of the year, Tim Fenton, president for Asia, the Middle East and Africa, said last month. The company raised prices for its burgers, drinks and snacks in November.
Standard Chartered Plc analysts on Monday raised their short-term rating for the ringgit to overweight from neutral, citing expectations of Bank Negara Malaysia rate increases and gains in China’s yuan that will make exchange rate appreciation more tolerable to Malaysian authorities.
Bank Negara may still hold its fire this week and keep its benchmark at 2.75%, according to 13 of 17 economists in the Bloomberg survey. Governor Zeti Akhtar Aziz started raising rates in March last year, helping contain price pressures even as economic growth accelerated to the fastest pace in a decade in 2010. In contrast, Indonesia increased borrowing costs only in February this year, while the Philippines has refrained from moving its benchmark.
Malaysia might be doing the best job in fighting inflation, Varathan said. They moved pre-emptively, decisively and unwaveringly and that has bought them a lot of elbow space and left them very comfortable now.
At its last meeting in January, the central bank signalled it may use other monetary policy tools to manage excess cash that’s building up in the financial system, including the amount of money lenders need to set aside as reserves.
Policymakers are monitoring the impact of higher commodity prices on inflation and economic growth, Zeti said last week.
“We have seen this kind of levels of energy and commodity prices before and we have the capability to deal with it,” Zeti said on 3 March. “We have to look and make the assessment whether it is temporary arising to these disruptions in supply, or whether it’s something more permanent. All these issues will be carefully evaluated to see how we need to respond.”
Sri Lanka’s central bank left its repurchase rate unchanged at 7% and the reverse repurchase rate at 8.5% on Tuesday, even as inflation climbed to a 25-month high. Policymakers are comfortable with the current level of rates and inflation is being spurred mainly by supply constraints, governor Ajith Nivard Cabraal said on 1 March.
The Reserve Bank of New Zealand will likely cut its official cash rate by at least 0.25 percentage point on 10 March to boost an economy that contracted in the third quarter and has been further hurt by the country’s deadliest earthquake in 80 years in February, according to 10 of 15 economists surveyed by Bloomberg.
The Bank of Korea will increase its benchmark rate to 3% on 10 March, according to all 15 economists in the Bloomberg survey. Finance minister Yoon Jeung-hyun said on Monday that the government is currently putting more focus on price stability than growth.
South Korea and Thailand have price controls on some goods and services including electricity and gas.
The Bank of Thailand lifted the policy rate at its last meeting on 12 January and signalled further increases. Seventeen of 20 economists surveyed by Bloomberg expect an increase to 2.5% in the benchmark rate on 9 March, from 2.25%.
The South-East Asian nation’s core inflation rate, which excludes fresh food and fuel prices, climbed to almost a two-year high in February.
The central bank will continue to advocate its intention of front-loading rate hikes to anchor inflation expectations amid rising commodity prices and strong growth, said Rahul Bajoria, an economist in Singapore at Barclays Plc. He forecasts the Thai rate will rise to 3% by the middle of the year.
Shamim Adam in Singapore, Anusha Ondaatjie in Colombo, Suttinee Yuvejwattana in Bangkok, Eunkyung Seo in Seoul, Barry Porter in Kuala Lumpur, Manish Modi in New Delhi, Dan Petrie in Sydney, Sarina Yoo in Seoul and Nerys Avery in Beijing contributed to this story.