Rate Cuts Loom in Asia as Inflation Retreats

Japan flagged a threat of deflation and Australia's key price gauge tumbled in November and central banks across the Asia-Pacific looked set to seize on the rapid retreat in inflation to cut interest rates.

Thailand, South Korea and Indonesia are all due to report inflation data on Monday.

Australia's central bank is expected to slash its interest rates by at least 75 basis points on Tuesday to stave off recession and a record drop in a closely-watched private inflation gauge raised bets on an even bigger move.

"We suspect a move of 100 basis points is more likely now," said Michael Workman, a senior economist at Commonwealth Bank. "With inflation slowing more quickly than expected, there's really no harm in being aggressive to support growth."

Japan, where borrowing costs are already close to zero and inflation is also coming down sharply, has limited room for manoeuvre on rates and is bracing for another spell of a devastating combination of falling demand and prices.

Wage data out on Monday showed total cash earnings of Japanese workers fell 0.1 percent from a year earlier, the first drop in 10 months, boding ill for the economy already in a recession.

The country's Economy Minister Kaoru Yosano painted a bleak picture despite government plans for spending to prop up the world's second biggest economy.

"We are moving to the next phase of shrinking consumption - some call it deflation - production going down and prices going down," Yosano told the Financial Times in an interview published on Monday.

The global financial crisis that began with a U.S. housing market slump last year and escalated into a full-blown global downturn has already knocked several major economies into recession including Germany, Italy and the euro zone as a whole. Most economists believe the United States and Britain will soon join the list.
    
Ample Room

For months mounting evidence of economic slowdown combined with soaring inflation, fuelled by the final leg of a record-breaking surge in oil and other commodity prices, complicating policy response to the looming economic slump.

But with oil prices now at just over a third of their July peaks and inflation retreating around the world at a pace that surprised even the most dovish central bankers, bets are now on massive monetary policy loosening around the globe.

In Australia, which hopes to avoid a recession with a combination of extra government spending and interest rate cuts, some economists expect the benchmark rate may drop from current 5.25 percent to as low as 2.5 percent some time next year.

"There has been a quite staggering turnaround in price pressures," said Joshua Williamson, senior economist at TD Securities, which compiles Australia's monthly inflation gauge. "It fundamentally changes the economic and policy outlook."

In Europe, the European Central Bank is expected to slash rates by 75 basis points or even a full percentage point after data showed on Friday the biggest ever drop in euro zone inflation.

Similarly, inflation is expected to drop across Asia in several countries that had been hit particularly hard by the spike in energy and food prices earlier this year.

Thailand is expected to report on Monday that annual inflation tumbled to 2.6 percent in November from 3.9 percent in October, giving the central bank room to cut interest rates this week after two rate increases earlier this year.

South Korea, Asia's fourth-largest economy, is expected to report its annual inflation rate at a seven-month low of 4.6 percent, again, allowing the central bank to continue cutting interest rates to help the economy battered by the global crisis.

Only Indonesia, grappling with capital outflows and weakening currency, is expected to see little relief on inflation with the November rate seen at 11.6 percent, close to the previous months and too high to trigger an interest rate cut.

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