Emerging Markets, September 2011

Asian central bank governors are shifting their focus from inflation to growth in the wake of problems in the world economy.

The Bank of Thailand 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. “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,” Prasarn Trairatvorakul, Governor, told Emerging Markets. “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 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 international trade had been shifting towards an intra-regional focus, and less from the USA and the eurozone, so from his perspective “the feeling is not too pessimistic or optimistic. 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.”

Prasarn said that international investors appeared to have responded well to Thailand’s new government. “On the positive side, the winning is quite clear, rather than a political system which is split,” he said, noting the stock market had risen after the election. “Longer term it very much depends on the results: the outcome of the work produced by the government.” He did, however, appear cautious about a controversial new rice policy that pledges to buy rice at inflated rates and has pushed rice prices up globally. “That’s also our concern,” he said. “We hope that whatever the plan, it will be executed efficiently.”