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Saturday, 21 June 2008

Inflation bigger threat to Asean growth than US slump

Central banks forced to change direction to combat it: Moody's

Business Times - 20 Jun 2008
By CONRAD TAN

(SINGAPORE) Soaring inflation and the response it triggers from central banks is a greater threat to economic growth in Asia than the downturn in the US, a senior spokesman for ratings agency Moody's said yesterday.

Asian central banks that were previously easing monetary policy to help cushion their domestic economies from the impact of slowing growth in the US, Europe and Japan have now been forced to change direction because of a rapid increase in food and energy prices, said Thomas Byrne, a senior vice-president and regional credit officer for Moody's sovereign risk unit in Asia and the Middle East.

'Inflation has become our foremost concern,' he said at a news briefing to present the Moody's outlook for South-east Asian banks and governments. 'The policy response to inflation - tightening by central banks or reluctance to ease because of the inflationary pressure - this will probably have a greater effect on economic growth in Asia than the sub-prime and credit market crisis.'

Policy-makers who target only 'core' inflation - which exclude changes in food and energy prices on the premise that their volatility distorts the overall price measure - could risk acting too late to stem rising prices because higher food and energy prices do spill over to other goods and services, Mr Byrne said.

'When we look at inflation we tend to look at headline inflation,' he said.

The US economic slowdown and the turmoil in financial markets that started in the sub-prime mortgage market there will have a 'fairly moderate' effect on Asian trade, he said. 'So the trade channel won't transmit this drag very strongly into the Asian economic outlook.'

Instead, 'what's happening is that central banks aren't easing when they previously wanted to ease and some of them are actually starting to tighten or are tightening more vigorously' because soaring food and energy prices are driving up business and household costs.

This will have a greater effect on dampening economies in Asia than slowing exports due to weaker growth in the US, Mr Byrne said.

'Also, high inflation means that in real terms purchasing power is eroded, so the ability of household consumption to support growth is somewhat diminished.'

Still, 'globally, we don't expect this inflationary episode to be as severe as the ones in the 1980s or 1970s', he added.

And Asia as a whole 'won't have as high inflation as other regions - say, the former Soviet Union countries or the Middle East'.

Moody's credit ratings and ratings outlooks on most Asian governments are still stable, 'but the risks are on the downside', Mr Byrne said.

The firm expects the US will suffer slower growth this year but escape a recession. Moody's is forecasting real gross domestic product growth of 1.5 per cent in the US in 2008 and 2.5 per cent next year - well ahead of the International Monetary Fund's forecasts of 0.5 per cent and 0.6 per cent respectively.

But 'a lot of this depends on oil prices and the Fed's response - whether it starts to tighten later this year or not', said Mr Byrne.

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