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Asia’s Inflation or Growth Dilemma

Updated On: Jun 06, 2008

Central banks around the region are confronting a dilemma: how to restrain inflation while not derailing economic growth. Core inflation has been increasing, albeit slowly, since 2003. But only after the recent spike in energy and food prices has action been triggered.

Central banks in Indonesia and the Philippines raised benchmark interest rates by 25 basis points on Thursday 5 June 2008. Manila’s rate hike was the first in three years. But while rates are now 5.25%, data shows inflation running at 9.6%, a nine-year-high. In Jakarta, the inflation rate increase to 8.5% follows a similar increase last month, but was not as big as many analysts predicted. Year-on-year inflation in May 2008 was 10.38%, the highest since September 2006.

Malaysia, having increased petrol prices this week, is also expected to raise rates soon. Similar moves are anticipated in Thailand.

Real interest rates are now negative in relation to inflation rates by an average 1.7 per cent in Asia (excluding Japan), according to UBS. This is far below the level both before and in the aftermath of the Asian financial crisis a decade ago.

(For more information, see Financial Times, “Asia acts to fight inflation” 5 June 2008)