Asian central bank governors are shifting their focus from inflation to growth in light of the deteriorating global economic outlook.
The Bank of Thailand (BoT) has raised rates on seven consecutive occasions since December, to 3.5%, in an attempt to combat inflation pressures, but that process appears to be over for the time being.
BoT governor Prasarn Trairatvorakul told Emerging Markets: “I think we were on the right direction so far, but if you ask the question from now on, we do think the slowdown in the world economy will mollify somewhat the inflation pressure.
“The job is to take a proper balance, but the balance lately has tilted towards the risk of growth becoming more apparent than inflation pressure.” Bank of Thailand’s next meeting on interest rates takes place on October 19.
In some respects, the global slowdown makes life easier for Asian central bank governors, who in many cases – most notably India and Vietnam – have wrestled with limited success with inflation this year.
“We hope that some slowdown in the world economy will lower the pressure from the supply side,” Prasarn said. He added that domestic consumption in Thailand remained very strong.
Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, agreed that inflation had largely ceased to be a pressing issue for Asian central banks.
“As commodity prices stabilized, which was a major factor from the supply side producing higher inflation, demand has slowed globally,” she said.
“This will limit inflation, so most central banks have paused their increases in interest rates.” Bank Negara hiked rates in four steps from 2% to 3% from late 2010, “to normalize interest rates and adjust the degree of monetary accommodation” – but ceased in July, “given the increased uncertainties and the significantly heightened risks to growth”.
Zeti said she expected emerging markets to continue to grow, but at a slower rate due to the global economy. “In emerging markets we are doing better [than in the West] but we are going to see moderation in our growth,” she said. Malaysia’s economic growth was just 4% year-on-year in the second quarter of 2011, though Zeti has said she expects full-year growth of at least 5%.
For central bank governors in Asia, “the biggest challenge is to have price stability in an environment of sustainable growth,” Zeti said. “You have rising prices, and at the same time you also have risks to growth, and those risks have become higher because of what is happening around the world.”
Prasarn noted that Thailand’s increased trade with neighbouring Asian economies should partly cushion the impact of a downturn in Europe and the US and that he was neither “too pessimistic or optimistic” about the likely impact on Thailand.
“There are threats from what’s happening in the euro zone and the US, but there are also encouraging factors like regional integration in trade and financial flows,” he said.
Prasarn also said that international investors appeared to have responded well to Thailand’s new government.
“On the positive side, the [margin of victory] was quite clear, rather than a political system which is split,” he said.