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ADB: East Asia Is Moving Too Slowly to Fight Inflation

The Asian Development Bank said on Tuesday that central banks in East Asia were moving too slowly to combat the threat of quickening inflation, which it warned seemed to be seeping into the broader economies of the region.

Outline of Asia, Map of Asia
CNBC.com
Outline of Asia, Map of Asia

It said timely action by policy makers was needed to maintain East Asia's healthy growth rate, which it forecast at 7.6 percent for both this year and next, otherwise the region risked a damaging spiral of wages and prices.

"Inflation will likely continue to plague much of emerging East Asia, as current record global energy and food prices seep down into overall economic activity, and there are few signs that they will subside any time soon," the Manila-based development bank said in its latest forecast.

"A nagging rise in core inflation across the region suggests that second-round price effects may be already underway, risking an upward spiral of wages and prices; today's headline inflation may translate into tomorrow's core inflation."

The ADB said the economies faced stronger headwinds from inflation, weakness in external demand and the subprime turmoil, but were weathering these thanks to strong domestic demand.

The agency said 2008 and 2009 growth of 7.6 percent would be slightly above the 2000-2007 trend, but about 1.5 percentage points below the 2007 peak.

It made little change to its growth forecasts for most of East Asia economies compared with predictions it made in April, although it sharply increased the inflation outlook for most countries.

It said growth in China, the world's fastest-growing major economy, should be 9.9 percent in 2008, breaking five straight years of double digit expansion.

Growth in 2009 would be 9.7 percent and forecasts for both years would be a shade below the April predictions of 10.0 and 9.8 percent, respectively.

"Although a series of tightening measures to curb rapid investment growth and asset price inflation appears to have had some impact, increased public spending -- especially related to the upcoming Olympic Games and efforts to encourage the rural economy -- continues to offset the overall effect of these measures," it said.

The ADB includes Brunei, China, Cambodia, Hong Kong, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam in emerging East Asia.

Compared to the April forecasts, growth was seen easing in the Philippines and Vietnam, but those for other economies were at relatively the same level.

Inflation, however, was seen to be higher across the region, including 7.0 percent in China this year from the previous forecast of 5.5 percent.

"Across the region, most inflation targets set for 2008 have already been breached, increasing pressure on monetary authorities to take further action," the ADB said.

It said many of the region's central banks had begun tightening measures, but they remained behind the curve in reacting to inflation.

"Timely and pre-emptive action in times of price volatility is critical to controlling inflationary expectations and maintaining policy credibility, thus ensuring that sustained, robust growth is not derailed."