Manila: Asia’s high inflation problem is due to lax monetary policy rather than soaring food and energy prices, and the threat of “lasting damage” is real, the Asian Development Bank (ADB) warned on Wednesday.
The Manila-based lender on Tuesday jacked up its 2008 inflation forecast for developing Asia to 7.8% from the 5.1% it predicted in April.
Meanwhile it trimmed its economic growth forecast for the region to 7.5% from 7.6%.
“External food and oil price shocks explain less than 30 percent of Asia’s CPI (consumer price index) inflation, while excess aggregate demand and inflationary expectations account for about 60 percent,” said a study by ADB economists Juthathip Jongwanich and Park Donghyun.
It said the spike in commodity prices has given the region’s policymakers “an excuse for not raising interest rates.”
The bank warned that “monetary policy accommodative of the food and oil price shocks” will only reinforce the problem.
“This truly frightening prospect gives the region’s central banks every reason to wake up to the importance of subduing inflation before it becomes entrenched and inflicts lasting damage on the economy.”
The ADB study said loose monetary policy that encouraged excessive demand was the result of governments’ priority to get their economies back on their feet after the 1997 Asian financial crisis.
The region did recover swiftly in the past decade in a regime of low inflation, but the study said this may have “lulled monetary authorities into complacency.”
It acknowledged that tightening now was “not without significant risks” including reinforcing economic contraction amid falling demand for Asian exports and global economic slowdown.