Southeast Asian nations will see its inflation reaching the highest levels in 10 years next year driven by higher energy prices, a recovering domestic demand and employment, setting the stage for a monetary policy tightening across the region.
SKYROCKETTING energy prices, a recovering domestic demand and employment will drive inflation in the Association of Southeast Asian nations to its highest level in 10 years.
As a result, it will set the stage for a monetary policy tightening across the region, said Bloomberg citing the forecast of Bank of America Securities.
Inflation to stay
These factors will push inflation to an average of 2.7 percent in 2022, up from an estimated 2.2 percent this year, said Faiz Nagutha, BofA Securities ASEAN economist at a media briefing on Thursday.
Vietnam and Indonesia are set to see the steepest price growth, Bloomberg reported.
“Inflation is here, and it’s here to stay,” Nagutha said, adding that it will likely peak in the early part of 2022 before coming off a bit and staying at elevated levels.
Global inflation
Global inflation is seen to hit 4.3 percent next year, up from 3.9 percent expected this year.
Other key points from the briefing are:
The US Federal Reserve will likely double the pace of reducing its asset purchases at its December meeting and will deliver three rate hikes next year starting in June.
A faster Fed taper, along with accelerating inflation, will put pressure on some ASEAN central banks to tighten sooner.
Higher basis points
Indonesia is seen to hike by 75 basis points (bps), Malaysia and Vietnam by 50 basis points, while Thailand and the Philippines are expected to raise their key rates by 25 bps each next year.
Singapore may further tighten monetary policy on top of a 50-basis-point increase in the currency slope expected in April.
Subdued inflation
From Jakarta, Nikkei said that amid weak domestic recovery from COVID-19, countries in Southeast Asia are experiencing subdued inflation, and so their central banks are likely to keep their benchmark interest rates unchanged for now.
To be sure, economy-wide headline inflation has been creeping up due to global inflationary pressures like supply chain bottlenecks and higher fuel prices.
But price rises in major Southeast Asian countries such as Indonesia, Malaysia and Thailand have remained below or in line with their central bank's inflation target, a stark contrast to developed nations like the US and the UK, which have seen their headline inflation hit multiyear highs.
Good sign
This situation bodes well for the region's central banks, mitigating pressure to hike rates at a time when the US Fed is beginning to wind down its massive monetary stimulus, which usually would cause emerging markets to increase their benchmark interest rates to keep their currencies stable.
Keeping lower rates for longer could also prove to be vital in supporting the economy if countries decide to tighten their COVID-19 social restrictions again due to the new omicron variant.
The strain has already been found in Thailand and Malaysia.
The country experiencing by far the weakest price rises is Indonesia, where headline inflation has remained well below its central bank's target range of 2 percent to 4 percent; the consumer price index (CPI) only rose 1.75 percent year-on-year in November.
Weak domestic demand
This is "due to weak domestic demand and a negative output gap," wrote Helmi Arman, an economist at Citi, in a recent report. "We think that a return of inflation into the lower-half of the target range in 1Q22, as demand further recovers, will probably be welcomed by policymakers."
Even in countries like Thailand and Malaysia, where the consumer price indexes have crept up in recent months, central banks are forecasting subdued inflation.
Thailand's headline consumer price index rose 2.71 percent on the year in November, its highest level since April but within the central bank's target range of 1 to 3 percent.
The Ministry of Commerce expects inflation to gradually fall next year, forecasting headline inflation of 0.8% to 1.2% for 2021.
Malaysia also hit a multi-month high in inflation in October, with consumer prices up 2.9 percent, but also within the central bank's projected range of 2 to 3 percent this year.
In the last monetary policy statement in November, the central bank said the headline inflation is projected to "remain moderate" into 2022.
Measures
Administrative measures have played a role in keeping Southeast Asia's inflation in check.
The Indonesian government continues to subsidize fuel prices, mitigating the impact of global commodity price rises.
In a similar vein, Thailand's government in November capped diesel prices at 28 baht (90 cents) per liter from December to tame the domestic repercussions of higher global fuel prices.
Main driver
But the main driver of lower inflation in emerging Asia has been food, said economists at Capital Economics. "Whereas food price inflation is very high across Eastern Europe and Latin America, it is weak in Asia," they said in a recent report.
"Part of the reason is that unlike with energy ... the global prices of different food items often don't track each other. For example, whereas global wheat prices have been rising sharply, rice prices are currently falling.
"This has put downward pressure on inflation in countries that consume a lot of rice which isn't seen in countries that depend more on other staples," they added.
High food prices
Food also explains the relatively high price rises in the Philippines, which recorded a headline inflation rate of 4.2% in November, higher than the central bank's target of 2 to 4 percent.
Food prices, particularly meat, surged early this year due to supply constraints from African swine fever, which hit local farms.
Food also accounts for 35 percent of the country's consumer price index, higher than other countries in the region, making it vulnerable to price swings.
Al Jazeera reported that Southeast Asian economies including Malaysia, Thailand, and the Philippines are considered unlikely to raise rates before 2023 due to gross domestic product remaining 4-6 percent below pre-pandemic levels.
Nascent recoveries
Indonesia is not expected to consider a rate hike until after the US Federal Reserve raises rates, which is not expected until September 2022.
“We forecast core and headline inflation to trend higher over 2022, but we still expect inflation, on average, to remain below central banks’ medium-term inflation targets,” Fenner said. “As such, central banks have the room to prioritize supporting their nascent recoveries.”
China is considered unlikely to raise rates in 2022 after adopting accommodative policies this year to boost flagging economic growth, according to the briefing, as authorities “remain keen on containing financial risks and leverage.”
But Trinh D Nguyen, a senior economist at Natixis, told Al Jazeera she expected more broad-based tightening across the region.
“We think Asia will tighten monetary stance except for China and Japan,” Nguyen said. “Emerging Asia excluding China will follow the Fed with tightening, but the pace will be modest and gradual.”
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