INFLATION IN ASIA

ASIA RATES HAVE ROOM TO RISE

Reuters

Indian Express, July 17, 2011

Asia's emerging market central banks will need to keep ratcheting up interest rates well after inflation peaks to prevent higher prices from seeping into corners of the economy where they are much harder to dislodge.

Two months after global oil prices began to subside from a spike fed by Middle East unrest, the worst appears to be over for China, Indonesia, and a handful of other Asian economies that struggled to contain inflation this year.

But it may be only a short-lived reprieve. Home-grown inflationary pressures are building, stemming from tight labour markets, rising property values and growing domestic demand, meaning rate rises may continue at least through 2012.

China is the country to watch. Not only is it the biggest player on the block, but it has become a role model for some other policymakers in the region and a bellwether for investor sentiment on Asian emerging markets.

"We do expect inflation to roll over in the coming months," Frederic Neumann, co-head of Asian economics research at HSBC, said in a telephone interview from Hong Kong. "But make no mistake, there is underlying inflation that will not disappear in China."

Neumann thinks last week's interest rate hike from the People's Bank of China (PBOC) will be the last of the year but far from the final move of the tightening cycle.

A slim majority of economists polled by Reuters on Thursday predicted otherwise, calling for one more one-quarter percentage point increase in bank lending rates by year end.

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