Asia Confronts Oil Shock as Central Banks to Meet on Rates

Stronger Currencies
The currency of Malaysia, the first Asian nation to raise rates in 2010

A jump in crude oil costs in excess of 20 percent in the past two weeks is escalating the danger of inflation in Asia, where central banks are already grappling with consumer price pressures fueled by job and spending gains.
The Bank of Thailand and Bank of Korea will each raise key interest rates this week by a quarter percentage point, median estimates in Bloomberg News surveys of economists show. Malaysia may also be approaching the end of its pause in boosting borrowing costs, as four of 12 analysts polled see a March 11 move, the highest such share since the last increase, in July.
With the Federal Reserve refraining from any signal it’s ready to lift its benchmark from almost zero, currencies from South Korea’s won to Malaysia’s ringgit are set to gain versus the dollar this year, forecasts compiled by Bloomberg show. The region’s economies are strong enough to withstand the impact of faster inflation, the Asian Development Bank said last week.
“The region is particularly prone to food and oil price shocks as a greater percentage of household income is spent on food and transportation,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte. At the same time, “we’re very bullish on Asian currencies. They’ll continue to rise against the dollar this year, supported by rising interest rates,” he said.
Stronger Currencies
The currency of Malaysia, the first Asian nation to raise rates in 2010, has led gainers in the region, with the ringgit up 11.1 percent versus the dollar in the past 12 months, before 7 p.m. local time yesterday. Singapore, which uses its exchange rate as the main monetary-policy tool, has let its dollar climb 10.7 percent in that period. The won has by contrast risen 2.1 percent, as South Korean officials sought to counter speculative capital inflows.
Diminished resistance to currency gains in China may have a knock-on effect throughout Asia as the continent’s biggest economy also seeks to contain price pressures. People’s Bank of China Governor Zhou Xiaochuan said last month in Paris that his nation may use means “including rates and currency” to curb increases in food and home prices.
McDonald’s Corp., the world’s largest restaurant company, may raise prices at its China outlets in the second half of the year, Tim Fenton, president for Asia, the Middle East and Africa, said last month. The company raised prices for its burgers, drinks and snacks in November.
Standard Chartered Plc analysts yesterday raised their short-term rating for the ringgit to “overweight” from “neutral,” citing expectations of Bank Negara Malaysia rate increases and gains in China’s yuan that will make exchange-rate appreciation more “tolerable” to Malaysian authorities.
Malaysian Rate
Bank Negara may still hold its fire this week and keep its benchmark at 2.75 percent, according to eight of 12 economists in the Bloomberg survey. Governor Zeti Akhtar Aziz started raising rates in March last year, helping contain price pressures even as economic growth accelerated to the fastest pace in a decade in 2010. In contrast, Indonesia increased borrowing costs only in February this year while the Philippines has refrained from moving its benchmark.
Malaysia might be doing the best job in fighting inflation,” Varathan said. “They moved preemptively, decisively and unwaveringly and that has bought them a lot of elbow space and left them very comfortable now.”
At its last meeting in January, the central bank signaled it may use other monetary policy tools to manage excess cash that’s building up in the financial system, including the amount of money lenders need to set aside as reserves.
Policy makers are monitoring the impact of higher commodity prices on inflation and economic growth, Zeti said last week.
Sri Lanka
“We have seen this kind of levels of energy and commodity prices before and we have the capability to deal with it,” Zeti said March 3. “We have to look and make the assessment whether it is temporary arising to these disruptions in supply or whether it’s something more permanent. All these issues will be carefully evaluated to see how we need to respond.”
Sri Lanka’s central bank will keep its repurchase rate unchanged at 7 percent and the reverse repurchase rate at 8.5 percent today, according to all six economists surveyed by Bloomberg News.
The Reserve Bank of New Zealand will likely cut its official cash rate by at least 0.25 percentage point on March 10 to boost an economy that contracted in the third quarter and has been further hurt by the country’s deadliest earthquake in 80 years in February, according to 10 of 14 economists surveyed by Bloomberg News.
The Bank of Korea will increase its benchmark rate to 3 percent on March 10, according to all 14 economists in the Bloomberg survey. Finance Minister Yoon Jeung Hyun said yesterday the government is currently putting more focus on price stability than growth.
Price Controls
South Korea and Thailand have price controls on some goods and services including electricity and gas. The Bank of Thailand lifted the policy rate at its last meeting on Jan. 12 and signaled further increases. Fourteen of 16 economists surveyed by Bloomberg expect an increase to 2.5 percent in the benchmark rate on March 9, from 2.25 percent.
The Southeast Asian nation’s core inflation rate, which excludes fresh food and fuel prices, climbed to almost a two- year high in February.
“The central bank will continue to advocate its intention of front-loading rate hikes to anchor inflation expectations amid rising commodity prices and strong growth,” said Rahul Bajoria, an economist in Singapore at Barclays Plc. He forecasts the Thai rate will rise to 3 percent by the middle of the year.
Crude oil prices rose to a 29-month high yesterday as escalating violence in Libya renewed concern supply disruptions may spread through the Middle East. Crude for April delivery rose to as high as $106.45 a barrel, the highest level since September 2008.
To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Michael Munoz in Hong Kong at mjmunoz@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net