Asian nations need 'clearer resolve' to tackle inflation

Asian nations need 'clearer resolve' to tackle inflation
Jun 28, 2008
The Straits Times
Gabriel Chen

ASIAN nations need a 'clearer resolve' about taming inflation, whether by hiking interest rates or strengthening currencies, said Finance Minister Tharman Shanmugaratnam last night.

He warned that not doing enough could result in stagflation - slowing economic growth and rising inflation.

'Stagflation is not a foregone conclusion. How policies respond will very likely determine if we do enter a period of stagflation,' said Mr Tharman in the keynote address at the Association of Banks in Singapore's (ABS) annual general meeting at Shangri-La Hotel last night.

The key challenge for Asian economies, he added, is to prevent a second round of inflation in which workers demand a higher wage to compensate for the higher cost of living.

'To put the matter pointedly, a rapidly growing Asia cannot continue to import US monetary policy if it is to check inflationary pressures,' he warned.

Interest rates in Asia have been coming down in tandem with rates in the United States because Asian foreign exchange rates have 'limited flexibility', he explained.

He said the US Federal Reserve had made the mistake in the 1970s of allowing inflationary expectations to set in, leading to a dramatic period of stagflation.

Mr Tharman also said that Singapore's inflation rate this year is now expected to average 5 per cent to 6 per cent with a tapering off towards the end of the year.

'However, the strong run-up in global oil prices means that there is more risk of inflation on the upside,' Mr Tharman warned.

He said the Monetary Authority of Singapore's policy of a gradual appreciation of the Singdollar is 'succeeding in mitigating inflationary pressures'.

Since April 2004, the Singdollar has appreciated by 12 per cent against its trade-weighted basket of currencies - or by 23 per cent against the US dollar.

A stronger Singdollar means cheaper imports, which in turn keeps imported inflation down. But it makes Singapore's exports dearer, which can hurt businesses.

But Mr Tharman cautioned that while most Asian economies need to take action, it should not be too dramatic, whether by raising interest rates or engineering a sharp appreciation of currencies.

He said many Asian economies lack liquid derivative markets in which businesses and banks can hedge their risks, while several also lack 'modern systems' of risk management.

'Sudden, large moves in monetary policy pose real risks of financial instability, and if subsequently reversed, will lead to a loss of credibility for central banks,' he added.

ABS chairman David Conner, who also addressed the gathering about the economic slowdown and inflation woes, said the banking industry in Singapore has largely avoided the excesses of its peers in North America and Europe.