A day after China lifted interest rates for a second time this year and fourth time in six months to increase pressure on high levels of inflation; the Asian Development Bank said inflation was the "top priority" for the region.
China’s rate rise came the same day Australia sat on rates, but followed increases in the past month or so across the region as governments from India to South Korea tighten monetary policy to slow strong growth, and prices boosted by rising oil and food prices.
The Chinese move had no impact on the country’s sharemarket which closed higher yesterday.
China’s inflation rate is currently running at 4.9% for consumer prices and more than 7% for producer cost increases and economists say that when the March figures are released late next week, both readings will again be high.
So the warning yesterday from the Manila-based ADB that some developing economies in Asia were showing signs of "potential overheating" was timely.
China’s move was another warning to Australia that we have to closely watch the economy of our most important trading partner for developments like the four rate rises and nine increases in the asset reserve ratios for the country’s banks since the start of 2010.
But while the inflation warning from the ADB is also a cautionary note for Australia (the region, including disaster-hit Japan, is our main export zone), there is also reassurance that economic growth will not slow sharply or come to a shuddering halt which wouldn’t be good for our economy.
The bank said inflation was likely to hit 5.3% in 2011, up from 4.4% last year thanks to the boost to oil and energy prices from the tensions in North Africa and the Middle East, the impact of the quake, tsunami and nuclear crisis in Japan and the continuing rise in food prices.
"Inflation pressures are building and pre-emptive measures may well be needed to avoid overheating," the ADB said in its 2011 Asian Development Outlook.
It warned higher oil and food prices could "shake developing Asia’s macroeconomic stability" and cause widening income inequality and "potentially lead to social tension".
Food costs across the region hit record highs in February, the ADB said.
Crude prices surged to two-and-a-half-year highs on Monday with Brent crude topping $US120 a barrel for the first time since last August on fears the ongoing conflict in Libya and unrest across the Middle East could disrupt oil supplies.
The ADB said growth in Asia’s gross domestic product would likely slow to 7.8% this year from 9% in 2010 as China and India slowed.
China, the world’s second-largest economy, was expected to grow 9.6% this year compared with 10.3% in 2010.
The ADB estimates China’s growth will slow to 9.2% next year, which means continuing solid demand for commodities produced by countries like Australia.
First quarter growth figures for this year are due out on April 15.
Chinese inflation is projected to be 4.6% through the year, slowing to 4.2% in 2012, still above the increased 4% target of the government, a sign the battle to keep a lid on cost increases in the country will be a bit longer than expected.
India is forecast to grow 8.2% for the fiscal year ending March 31, 2012 compared with an expected 8.6% for the year to March 31, 2011.
The ADB acknowledged that managing inflationary pressures was not easy and a "coherent" policy mix was the key to success.
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"More flexible exchange rates may be a better policy for countries with persistent current account imbalances and misalignment between their exchange rate and fundamentals," the ADB said, in a thinly veiled reference to China reluctance to let its currency float.
"For countries without such symptoms, relying more on temporary policies, such as capital controls, may be an option."
East Asia will continue to lead the region’s post-crisis recovery with projected growth of 8.4% in 2011 and 8.1% next year, according to the ADB.
These forecast expansion rates are below the 9.6% recorded in 2010, because fiscal stimulus measures are unwinding, investment is slowing and exports are easing as well.
With China’s growth slowing, the bank sees Hong Kong, China; the Republic of Korea; and Taipei,China also slowing to more sustainable growth rates of around 5%.
"Most economies are tightening monetary policy amid rising commodity prices with inflation forecast to pick up to 4.3% in 2011 from 3.1% in 2010," the ADB said.
Southeast Asia’s expansion will moderate after an exceptionally strong recovery in 2010, with growth coming in at 5.5% for 2011 and 5.7% in 2012.
The figures are well below the 7.8% recorded last year, and reflect a higher base, slower export growth and fiscal and monetary policy tightening.
Inflation is set to accelerate to 5.1% in 2011, from 4% in 2010, with Vietnam likely to post a double digit rate. Vietnam this week boosted wages 14% to try and help workers offset the impact of high inflation. It is following China which made similar moves last year and earlier this year.
"With appropriate policy measures, Southeast Asia’s average inflation is expected to come down to 4.2% in 2012," the ADB forecast.
"South Asia will maintain its recent robust economic performance with forecast growth of 7.5% in 2011 and 8.1% in 2012, following a 7.9% expansion in 2010.
"India’s 2010 performance was particularly strong and broad-based, even with fiscal consolidation and monetary tightening, and the economy is set to strengthen further to post 8.2% growth in 2011 and 8.8% in 2012.
"Pakistan’s devastating floods weighed on its growth performance, while the end of the conflict in Sri Lanka continued t
