Asian economists walking the tight rope between inflation and development, are finding it extrememly difficult to keep their balance of late.
Consumer prices are on a 26 year high in Singapore, 12 year high in China, and a 4 year high in India. Inflation has has grown 20 percent since last year in Vietnam and 8 percent in Indonesia. To add to Asia’s spiralling woes, General Electric (GE), a bellweather of the U.S. and global economies, underlined the risks to growth, confirming a slow down in the U.S markets, leading to a fall in Asian exports to the west.
In addition, India and China’s vast populations are now becoming richer fuelling demand for urban goods, meat and dairy products. Western subsidies for biofuels and global warming are also changing the food equation.
Asian governments on their part are pulling all the stops to reign in food and energy inflation and ride growth. While governments have been implementing trade and fiscal measures, central banks are soaking up liquidity and letting exchange rates appreciate.
Reuters asked – So how should policy makers react? Subsidies and export bans merely muffle price signals, economists say, so governments would do much better to invest in rural infrastructure, such as cold storage and irrigation, and target handouts at the urban poor.
“If food inflation has become an embedded dynamic and people have less money to spend on food, then raising interest rates to try to quell that seems a little perverse,” said Glenn Maguire, Societe Generale’s chief Asian economist based in Hong Kong..
The appropriate policy response, he said, would be continued currency appreciation, which would cut the cost of food imports and generally tighten monetary conditions. “That will be the most equitable way to handle these equity/distributional problems.”
Singapore did just that in decisive fashion on Thursday by effectively revaluing its dollar by at least 1.0 percent. Vietnam has widened the dong’s trading band. And China has now let the yuan rise 18 percent against the U.S. dollar since July 2005.
Of course, stronger exchange rates will eventually take a toll on exports. Which is why Asian central bankers are facing perhaps their toughest challenge since the 1997/98 financial crisis.
