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ADB urges central banks to act, says hikes won’t affect just food and fuel

A SECOND round of inflation may be on the cards for Singapore and the rest of East Asia - and this time it won’t be just food and fuel prices going through the roof.

These economies are already experiencing a ‘nagging rise’ in core inflation, which measures price rises beyond oil and food costs, said the Asian Development Bank (ADB) yesterday.

Part of this is due to higher food and energy prices flowing through to the rest of the economy, making other products and services more expensive. Another reason is the recent huge inflow of money from foreign investors coming to Asia and pushing up asset prices.

If governments do not act quickly to keep this second round of inflation in check, it could lead to a new set of broad-based price hikes, ADB warned an audience of 45 central bankers and academics as it launched its semi-annual Asia Economic Monitor report at the National University of Singapore’s Lee Kuan Yew School of Public Policy.

This could in turn trigger a dangerous upward spiral of wages and prices, where employers raise wages to offset inflation but pass on the higher labour costs by upping prices, the report added.

So far, central banks have moved too slowly in tackling inflation - which has reached 30-year highs in some economies - and they need to take more ‘decisive’ action, said Mr Jong-Wha Lee, head of the ADB’s Office of Regional Economic Integration.

In its report, the Manila-based bank cut its forecasts for economic growth across East Asia for this year and next, citing a global economic slowdown and record oil and food prices that show little sign of easing.

‘The unyielding demand for fuel and consistent worries over its supply conditions are expected to continue this year and may worsen next year,’ said Mr Lee. ‘We think the United States economy is likely to avoid a recession this year, but the outlook for a quick recovery is thin.’

ADB expects Singapore’s economy to grow 4.9 per cent this year, down from 7.7 per cent last year, with expansion tipped at 5.8 per cent next year.

It recommended some measures for East Asia’s central banks to combat inflation: tighten monetary conditions, allow currencies to rise faster and use fiscal measures like tax breaks and handouts selectively to help the poor.

Dr Khor Hoe Ee, the Monetary Authority of Singapore’s assistant managing director, responded to the ADB comments on Asia’s central banks being slow to react to inflation by stating that any response to rising inflation depends on its cause.

‘This sudden burst of inflation caught everyone by surprise,’ he said at a panel discussion at the launch. ‘At the moment, most of the inflation we have seen is confined to high oil prices and food.’ If that continues, tightening monetary policy will only exacerbate a downturn, he said.

But if there are other underlying reasons for inflation that spark a second round of price rises, this would be ‘more worrying’ and might warrant more central bank action, he added.

Source : Straits Times - 23 Jul 2008