Much of Asia is behind the curve in fighting inflation. The upward trend in inflation is apparent with the exception of China, which faces an overcapacity problem. As the Fed keeps raising interest rates, Asian currencies could weaken, which would exacerbate the inflationary pressure. The region’s central banks need to keep a tightening bias, I believe.
The region’s governments are too pro growth and are not vigilant enough against inflation or asset bubbles. As the Fed continues its rate hiking campaign, the risk is rising that the region could face another macroeconomic crisis.
Asia may also be bifurcating into high and low inflation economies. India, Indonesia, Philippines, and Thailand have high inflation and behave like traditional inflation-prone emerging economies. They should be especially vigilant against the potential scenario of weak currency and acceleration inflation.
India faces the greatest macro risk in 2006. It is exhibiting all the symptoms of an overheating emerging economy: widening current account deficit, overheating property market, and accelerating inflation. It should tighten as soon as possible, I believe.
The low-inflation economies should watch for asset inflation in determining their monetary policy. China and Korea stand out in that regard. Korea faces an emerging price bubble in its asset markets. The Bank of Korea is pursuing the right policy to normalize its monetary condition-policy rate at 4.5–5% vs. 4% now.
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