Diverging Inflation Paths Shape Asian Central Banks’ Room to Act
A naval officer walks past the Reserve Bank of India building in Mumbai. (Photographer: Kanishka Sonthalia/Bloomberg)

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

Pockets of inflation are flickering across some parts of Asia and fading in others, impacting central banks’ scope to further support economies in a region that’s leading the recovery from the Covid-19 pandemic.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

Here’s a look across the region, starting with those economies where inflation is on the rise:

Philippines

Philippine inflation hit a near-two-year high of 3.5% in December, driven by a sharp rise in food prices. Successive typhoons in the fourth quarter and the continued spread of African swine fever have hit the country’s food stocks, whose supply chains were already under strain from local lockdowns.

The Bangko Sentral ng Pilipinas said the inflation uptick will likely be transitory. It sees inflation staying above the mid-point of its 2%-4% target in the first half of the year, then easing to below 3%. BSP Governor Benjamin Diokno said there will be a “long pause” for rate cuts and the current monetary stance will likely stay for two quarters or even longer.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

Indonesia

Indonesia’s inflation has taken a more benign path, though the six-month high in December did put some economists on alert that it could start cutting into the central bank’s policy space. While inflation remained modest at 1.55% in January, it is expected to return within the central bank’s 2%-4% target range this year, helped by the government’s stimulus measures and firming consumer demand.

Bank Indonesia Governor Perry Warjiyo maintains he has ample room to ease further if necessary. Southeast Asia’s largest economy is bracing for the possibility its recession could go on for longer than expected, as virus curbs are reintroduced.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

New Zealand

New Zealand inflation was firmer than economists expected in the fourth quarter, adding to signs the central bank may not need to cut interest rates any further. Consumer prices rose 1.4% from a year earlier, matching the third-quarter reading. Economists’ expected inflation to slow to 1.1%. Prices rose 0.5% from three months earlier, exceeding the 0.2% forecast.

The Reserve Bank has projected that inflation will fall below the bottom of its 1%-3% target range this year, suggesting monetary policy will remain loose. But the economy has recovered more quickly than expected from last year’s Covid-induced recession, and signs of brewing price pressures make it less likely the central bank will need to ramp up stimulus.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

Australia

Australia’s consumer prices rose faster than forecast in the final three months of last year as the government amended funding to various stimulus programs amid an economy regaining momentum. The consumer price index advanced 0.9% from the third quarter, underpinned by increases in tobacco excise, compared with economists’ estimates of a 0.7% gain. Annual CPI also beat forecasts, similarly rising by 0.9% versus an estimated 0.7%.

The Reserve Bank of Australia has adjusted its inflation framework to allow the economy to run a little hotter. It doesn’t intend to tighten borrowing costs until inflation is sustainably within the 2%-3% target.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

China

China’s consumer prices rose in December after briefly declining in the previous month, while factory-gate deflation eased, providing more evidence of the country’s economic recovery.

The consumer price index rose 0.2% from a year earlier mostly driven by food costs, following a 0.5% decline in November. Factory deflation narrowed, with the producer price index registering a 0.4% decline, compared with a 1.5% drop in November.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

India

Headline retail inflation has eased led by a sharp drop in food prices. The consumer price inflation rose 4.59% in December from a year earlier, far below the November print of 6.9% and well within the Reserve Bank of India’s target range of 2-6%.

Still, Kaushik Das, chief India economist at Deutsche Bank in Mumbai, said that he saw “no reason for the RBI to celebrate a victory over inflation at this stage” as any idiosyncratic moves, including higher food or fuel price shocks could occur and pose a challenge to policy makers.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

South Korea

South Korea’s inflation picked up slightly in January as consumers stocked up on groceries ahead of the Lunar New Year holiday later this month. Consumer prices rose 0.6% from a year earlier following December’s 0.5% increase, data from the statistics office showed Tuesday. Economists had expected a 0.5% gain.

Bank of Korea Governor Lee Ju-yeol has pledged to continue supporting the economy. But he also warned against excessive borrowing that has spurred a rally in the country’s stock and property markets.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

Japan

Declines in Japan’s key inflation deepened in December as a resurgence of the coronavirus weighed on the economy. Consumer prices excluding fresh food fell 1% from a year earlier, with falling energy costs accelerating the decline.

At its most recent meeting, the Bank of Japan left all of its main policy settings unchanged as Governor Haruhiko Kuroda looked to keep all his options open for a policy review in March. The BOJ kept its projection that price growth is unlikely to meet the bank’s 2% target before early 2023.

Diverging Inflation Paths Shape Asian Central Banks’ Room to Act

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