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Asian Petroleum Review : Jan-March 2011
33 Rising oil prices present a new inflationary headache for Asia and further complicate the task of policymakers grappling with broader price pressures, an uneven growth outlook and surg- ing dollar inflows. Central bankers in Asia are reluctant to stifle growth by raising rates and are wary of exacerbating yield differentials with western economies and Japan that would further attract potentially destabilising capital flows. At the same time, rising prices are politically fraught in countries such as India and Indonesia, which must decide between taking the fiscal hit of offsetting fuel price increases through subsidies or pass costs onto inflation-wary consumers. Inflation is also a big worry for global economic pow- erhouse China, whose leadership perceives rising costs of living as a threat to social peace and stability. Beijing's Christmas day rate rise - - its second in two months - - underscored how its focus has shifted from nurturing growth to getting prices under control and India is expected to follow, resuming a tightening cycle that has brought six rate increases since March. Asia's No. 1 and 3 economies can find comfort in signs that growth had sufficient momentum to withstand further policy tightening, but others - - particularly those relying heavily on exports - - seem less certain about next year's prospects. Yet South Korea, Indonesia, Thailand and Philippines are all also expected to tighten mone- tary conditions in 2011. While raising rates can do little to cap cost-driven or im- ported inflation, it can help cool overall demand and con- tain inflationary expectations stoked by a broad rally in commodity markets. "It is difficult for individual countries such as South Korea to deal with inflationary pressure coming from these ex- ternal cost factors, " said Lee Sung-kwon, chief economist at Shinhan Investment Corp in Seoul. Lee said lowering tariffs on raw material imports, for ex- ample, will have a small impact on easing prices in South Korea, and expects the central bank to raise rates once each in the first and second quarters, to 3 percent from 2.5 percent now. "Global prices of oil and raw materials will stabilise if China raises interest rates and the impact of the hikes materialise in that economy, " Lee said. Thomson Reuters Asia Petroleum Review Rising oil price adds to Asia inflation headaches By Tony Munroe MUMBAI