Easing Prices Bypass India as RBI Lacks Tetangco Scope

BLOOMBERG - Moderating inflation pressure across most of Asia offers central banks scope to cut interest rates further in coming months, with Philippine Governor Amando Tetangco saying there is room for monetary easing.
The Asian Development Bank lowered its inflation forecast for the region last week to 4.4 percent this year from a 4.6 percent pace forecast in April. China this month reported the smallest price gains in more than two years.

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A vendor sells produce at a market in Mumbai, India. Photographer: Dhiraj Singh/Bloomberg

India today reported inflation unexpectedly eased while remaining above 7 percent, suggesting the central bank may be constrained even as counterparts ease. South Korea and China surprised markets with a reduction in interest rates this month.

Emerging-market policy makers “have by far the greatest room to counteract economic weakness,” JPMorgan Chase & Co. analysts led by Jan Loeys, chief market strategist in New York, wrote in a July 13 note. They can “boost spending through monetary stimulus, fiscal stimulus, or simply by providing more clarity about their future actions,” they said.

Emerging-market policy rates remain a percentage point above emerging-market inflation and have plenty of room to come down in nominal terms, the analysts wrote.

Price gains are easing across most emerging markets, helped by a decline in food and commodity prices. Inflation in China, Asia’s biggest economy, slowed to 2.2 percent in June from a year earlier and producer prices dropped for a fourth month.

The ADB also cut its 2012 growth forecast for Asian economies excluding Japan to 6.6 percent from 6.9 percent, citing the impact of Europe’s debt crisis and slower expansion in China and India.

Moderating Inflation

In India, a weaker rupee, government spending and rising food prices are helping maintain inflation risks. The benchmark wholesale-price index rose 7.25 percent from a year earlier, after climbing 7.55 percent in May, the commerce ministry said in a statement in New Delhi today.

The rupee, which has slumped 19 percent against the dollar in the past 12 months, strengthened 0.4 percent to 54.9450 per dollar as of 12:40 p.m. in Mumbai. Asian stocks climbed, with the MSCI Asia Pacific Index advancing 0.3 percent.

Elsewhere in Asia, the Philippines said overseas remittances rose at a slower pace in May from a year earlier. The European Union’s statistics office may say inflation in the 17-nation euro area in June was unchanged from a previous estimate of 2.4 percent, while a survey forecasts Switzerland will report industrial production fell in the first quarter from the previous three months.

Europe, U.S.
In the U.S., the Federal Reserve Bank of New York may say its general economic index rose to 4 this month, while the Commerce Department is forecast to report retail sales climbed for the first time in three months, surveys showed. Moderating Inflation

The fastest inflation among the biggest emerging markets prompted the Reserve Bank of India to unexpectedly leave interest rates unchanged on June 18 even after the economy expanded at the slowest pace since 2003.

“We expect the growth risks eventually to dominate the RBI’s thinking and lead to greater monetary easing in the coming months,” Barclays Plc economists led by Singapore-based Nigel Chalk wrote in a July 13 note. “However, given the complex domestic politics, the timing of any policy loosening is difficult to predict, especially given the RBI’s recent hawkishness.”

Wen’s Fine-Tuning

The People’s Bank of China unexpectedly announced a reduction in benchmark lending and deposit rates on July 5, the second cut in a month, while the Bank of Korea lowered its benchmark repurchase rate last week for the first time in more than three years.

China’s economy grew at the slowest pace in three years in the second quarter, data released July 13 showed, and Premier Wen Jiabao said yesterday the government will intensify fine- tuning policies as the momentum for a recovery has yet to be established.

Fiscal stimulus may be more appropriate for the region than monetary easing, which risks spurring asset and price pressures, Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc, wrote in a note today.

“Exports are about to drop off sharply, at least judging from various lead indicators,” Neumann said. “To avoid sudden weakness feeding on itself, measures are needed to bridge the lull in growth. Asia’s most appropriate answer to the current slump in growth, therefore, lies in comprehensive fiscal measures, not in making money cheaper still.”

Policy Space

Bangko Sentral ng Pilipinas Governor Tetangco said more easing may be possible as inflation in the Philippines moderates.

“The stance of monetary policy remains appropriate but things can change -- a possible easing cannot be ruled out,” he said in an interview in Manila on July 13. “While we have sources of resilience, we also have policy space on the monetary and fiscal sides to do more if necessary.”

Price pressures have cooled even as the $225 billion economy expanded 6.4 percent in the first quarter from a year earlier, the fastest pace in Southeast Asia based on a basket of 17 Asia-Pacific economies tracked by Bloomberg. Consumer-price gains slowed to 2.8 percent last month from a year earlier.

“One is never out of danger on inflation, but at this point in time risks are on the downside,” Tetangco said. “The growth of the economy is not at the level that would lead to a breach of the inflation target.”

Philippine Inflation

Inflation will be in the lower half of his 3 percent to 5 percent target, said Tetangco, adding his forecast applies to 2012 and 2013. Economic expansion in the second quarter probably remained healthy, he said, without providing an estimate. The data are due to be released next month.

The central bank cut the rate it pays lenders for overnight deposits twice earlier this year, by a combined 0.5 percentage point to 4 percent, before leaving it unchanged in April and June. The next policy rate review is on July 26.

Central banks in emerging markets “have become more dovish over the past one or two months and we do expect some monetary loosening,” Sebastien Barbe, Paris-based head of emerging markets research and strategy at Credit Agricole CIB, wrote in a July 12 note. “They may refrain from lowering rates quickly in the short term, just in case the global economic momentum re- accelerates at the end of the year, making the global backdrop more prone to generate inflation pressure.”

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