Inflation in emerging Asia sinks, further rate cuts loom

Published: 2009/05/02

BANGKOK: Inflation rates slowed once again in emerging Asia, pointing to a fresh round of interest rate cuts in Thailand and Indonesia as the region battles to reinforce tentative signs that economies may be on the path to recovery.

Indonesia said annual inflation stood at 7.3 per cent in April, its lowest level since December 2007, while South Korea also reported a fall in April inflation to a14-month low of 3.6 per cent.

However, Thailand saw a fourth straight month of falling prices or deflation with April consumer prices falling 0.9 per cent from a year earlier.

Prices are tumbling across the world as buyers tighten their belts in the face of the global recession and because of the collapse in commodities prices from record high levels last year.

Central banks globally have slashed rates in the hope that cheaper credit will spark a revival in their economies.

Governments have spent hugely on fiscal stimulus package and some data suggest the worst of the crisis may be over.

In Asia, exports have collapsed as recession in major demand centres such as the US and Europe hammered demand. But signs that the recession is easing have raised hopes that Asia's export engine may see a return of some demand, albeit from low levels.

Indeed, major exporters South Korea and Japan have both seen a pick-up in monthly exports even if they are still much lower than year-earlier levels. Annual falls in exports elsewhere have become less severe.

In Thailand, the fall in prices is seen as largely technical and reflective of the sharp falls in the past year in commodities prices rather than the result of falling demand.

"With very, very little risk of inflationary pressures, and with monetary conditions still fairly tight, there remains a scope to cut rates to support growth," Carl Rajoo, an economist at Forecast in Singapore said of the Bank of Thailand.

"The central bank is likely to make a measured cut in May, and then wait and see before additional loosening is started," he said.

The Bank of Thailand is due to review policy next on May 20, when analysts expect a 25 basis-point cut in the policy rate to 1 per cent.

In Indonesia, an easing in food price pressures and a 14 per cent rise in the rupiah against the dollar since early March, making imports more expensive, has weighed on prices.

Inflation has come down steadily from above 12 per cent just seven months ago giving the central bank room to keep cutting interest rates to support Southeast Asia's largest economy, whose exports are falling at close to 30 per cent.

"We expect Bank Indonesia to cut rates by 25 basis points in May and (in) June," said Helmi Arman, an economist at Bank Danamon in Jakarta. The central bank meets next Tuesday.

However, South Korea's central bank is seen holding fire for now. It has skipped rate cuts at its last two meetings and is expected by financial markets to leave rates unchanged at a record low of 2 per cent at its next meeting on May 12.

Inflation has fallen steadily, but growing optimism the economy may be starting to turnaround suggests the central bank will save its monetary ammunition for now. Since the financial crisis blew up last year, it has cut rates by an unprecedented 325 basis points.

South Korea's inflation rate fell to 3.6 per cent in April, its lowest level in 14 months but with some signs in the trade-reliant country that exports are picking up, the central bank is unlikely to use inflation as a cue to cut rates again.

The Philippines is expected to report on Tuesday that its consumer prices inflation fell to a 16-month low of 4.7 per cent in April, also paving the way for the central bank to cut its overnight borrowing rate, already a 17-year low of 4.5 per cent, at its next meeting on May 28. - Reuters