Accelerating rises in Asian consumer prices, especially the soaring costs of energy and food, may require central banks to raise interest rates further to limit the risk of overheating in their economies, the International Monetary Fund warned on Tuesday.
Inflows of capital to the region are helping to drive prices even higher, the IMF’s managing director, Dominique Strauss-Kahn, said in Singapore, warning that this could lead to social upheavals.
“In Asia, recent rate actions were the right decision — though more may be needed,” he said.
Policy makers in some countries may consider the short-term use of capital controls to aid financial stability, Strauss-Kahn said.
“In some cases, going back to capital controls may be of temporary use. But they should not be a substitute for necessary macroeconomic and macro-prudential policies,” he said.
Indonesia saw annual inflation hit a 21-month high of 7.02 percent in January, topping both market forecasts and missing the central bank’s end-2011 target range of 4 percent to 6 percent by a mile.
Core inflation slowed, however, sliding from 4.26 percent in December to 4.18 percent in January.
Indonesia’s central bank has been the only one in the region not to have adjusted its benchmark interest rate, which has stayed at 6.5 percent since August 2009 as Bank Indonesia has been trying both to avoid another wave of “hot money” capital flows and to support economic growth, expected this year to reach 6.4 percent.
It has said it will not raise interest rates unless core inflation, which excludes volatile items such as food and energy prices, approaches 5 percent.
But that is now beginning to be undermined by the rising cost of food, raw materials and supply shocks caused by erratic weather. The Central Statistics Agency (BPS) said rising food prices were the biggest drivers of inflationary pressure, with rice and chili peppers the primary culprits.
Inflation acceleration is also taking place in South Korea, with consumer-price gains breaching the central bank’s 4 percent ceiling in January, and to a lesser extent in Thailand. Elsewhere in Asia, India is seeing its manufacturing keep expanding while input prices are rising in China, separate reports showed on Tuesday.
Accelerating consumer-price gains prompted South Korea, Thailand and India to increase rates last month. China’s central bank has raised its benchmark interest rate twice since October and pushed banks’ reserve requirements to the highest in more than two decades to drain away cash that could stoke inflation.
The IMF last month raised its forecast for global economic growth this year, predicting an expansion of 4.4 percent. While a faster-than-expected second half of 2010 helped put the world on a stronger foothold this year, the IMF warned that risks to its predictions remain “elevated.”
“Looking more closely, we see a worrying development: the pre-crisis pattern of global imbalances is re-emerging,” Strauss-Kahn said on Tuesday.
Oil traded near the highest in more than two years in New York and Brent crude topped $100 a barrel after a seventh day of unrest in Egypt raised concern supplies may be disrupted.
State oil and gas company Pertamina on Tuesday increased the price of its unsubsidized fuel from Rp 7,850 per liter to Rp 8,050 (87 cents to 89 cents), raising worries that higher world oil prices may further push fuel prices up. Pertamina adjusts the price of its unsubsidized Pertamax fuel twice a month.
Tulus Abadi, managing director of the Indonesian Consumer Protection Foundation (YLKI), said the price of Pertamax rising by 2.5 percent was not as worrying as the government’s plan to ban private cars from using subsidized Premium fuel, starting in April for Jakarta and the rest of the country later in the year. That could push drivers’ fuel bills up nearly 100 percent as they would have to buy the almost twice as costly Pertamax.
“It will be so much better if the government increases the price of Premium, as banning people from using subsidized fuel would have a domino effect and would be more dangerous [for inflation],” he said.
With additional reporting by Elisabeth Oktofani