The global economic slowdown has brought emerging Asia's rate-hiking cycle to a premature pause and the next step could be easing if the United States slides into a recession or Europe's debt troubles spawn a full-blown financial crisis.
Central banks in Indonesia, Malaysia and the Philippines said on Thursday that inflation pressures were abating, and predicted they will get more relief as the weakening world economy chills demand.
This is not a sure bet. It assumes that a large portion of the price pressure emanates from abroad rather than from domestic demand, which may not be the case in countries such as China where growth remains strong.
But a look back at the 2008 financial crisis shows that many Asian countries are in a better position to respond to another downward spiral now should the need arise.
Even though inflation is running too hot for comfort across the region, it is lower now than it was in 2008 for some economies, including Indonesia and the Philippines.
Tim Condon, an economist with ING in Singapore, thinks those two countries may be cutting rates before year-end -- especially if the U.S. Federal Reserve announces more easing measures at its two-day policy-setting meeting that ends on September 21.
Both of them were victimized by behind-the-curve hysteria when world oil prices spiked earlier this year, Condon said.
I think the Fed will do something.... and that will be a pretty widely followed signal around the emerging markets that the right move is to become more accommodative.
CALLING THE PEAK
Condon's view is more dovish than the consensus. But several economists erased rate hikes they had penciled in for 2011 after Thursday's batch of central bank meetings. In all, six Asian central banks held policy-setting meetings this week, and all held rates steady, as expected.
Goldman Sachs, for example, now expects Philippine rates to be on hold through year-end, removing a quarter-point rate hike from its forecast.
We still expect tightening in most countries in Asia, just not by as much as previously, Goldman Sachs economist Fiona Lake wrote in a research note dated Thursday.
The most recent inflation readings were at the high end of or above central banks' comfort zones in China, Indonesia, the Philippines, Malaysia and India, which suggests the bias would be toward tightening if the global economy was not wobbling.
However, most central bankers and private economists think inflation has probably peaked. Chinese data released on Friday showed inflation rose 6.2 percent from a year ago, as expected in a Reuters poll, pulling back somewhat from July's 6.5 percent rise.
Whether Asia's inflation swiftly drops back to comfortable levels is an open debate. The 23 percent decline in oil prices since early May means one of the biggest sources of price pressures has cooled. But with China's economy still expanding at a 9+ percent annual clip, regional demand remains strong.
BLAMING ASSORTED ODDITIES
An assortment of oddities has kept inflation elevated three months after the oil price peaked. Indonesia blamed gold prices for an unexpectedly large rise in August inflation. In Australia, it was bananas.
Euben Paracuelles, an economist with Nomura in Singapore, said it is difficult to disentangle imported inflation from domestic demand-driven pressures, but weak global growth can bring down both types of inflation. Slowing global demand not only cools commodity prices, it also curbs exports, a primary source of growth for many of Asia's economies.
We're in the camp of inflation already peaking, so we think it is appropriate for central banks to signal a removal of a tightening bias given the global growth outlook, Paracuelles said.
If that growth outlook darkens dramatically, Asia's emerging market central banks clearly would ease policy regardless of whether inflation has receded to target levels.
Indonesia's central bank said on Thursday it would respond by rates and other monetary and macroprudential policies to mitigate any damage from an economic slowdown.
2008 CRISIS OFFERS CLUES
The region's response to the global financial crisis offers some clues about how Asian policymakers would balance the risks of high inflation against slowing growth.
In September 2008, when the Lehman Brothers bankruptcy sparked a deep global slump, inflation was well above 6 percent in Indonesia, the Philippines and China. Yet all three slashed rates sharply.
Not everyone has scope to be as aggressive now.
Chinese officials insist fighting inflation remains the policy priority. Relatively low interest rates have made it tougher for banks there to attract deposits needed to ensure lending conditions don't tighten too much. Fears of a property price bubble would also argue for caution in cutting rates.
India's central bank is widely expected to tighten at its policy-setting meeting on September 16, which would mark its 12th rate rise in 18 months. Despite those increases, its inflation rate is still by far the highest among Asia's major economies.
But next week's rate rise may prove to be the region's last of the year.
(Editing by Richard Borsuk)