Asia's Central Banks Beset by Threats Find Solace in Stable Food

Asian central bankers grappling with wobbly markets, higher energy costs and simmering trade tensions are getting relief from an old foe: food prices.

In a region vulnerable to volatile price swings, food inflation has been largely contained, thanks in part to favorable weather and increased investment in production, storage and distribution.

For developing nations like India and China — where food makes up a higher share of spending and consumer price indexes — that’s helped keep a lid on inflation and left them better placed to grapple with the strains caused by U.S. monetary tightening.

Less clear is how long the calm will hold.

“Food price inflation across Asia is subdued, but I don’t think central banks can afford to nod off,” said Sumiter Singh Broca, a Bangkok-based official at the Food and Agriculture Organization of the United Nations.

Malaysia, the Philippines, Indonesia, and India have already raised interest rates this year in a bid to support weakening currencies amid a sell-off in emerging markets and to get ahead of inflation pressures linked to rising fuel costs.

Read More: Inflation Bogeyman Prompts Fuel Subsidies Across Southeast Asia

Economists at Citigroup Inc. led by Johanna Chua note that although volatility in Asia’s food prices has receded, the oil rally and a cyclical bottoming of food inflation should generate higher risks — especially for fuel-sensitive economies like Thailand and Indonesia.

Oil Risk

Food has a weighting in CPI in Asia that’s more than three to four times larger than fuel and energy, according to Citigroup.

Shikha Jha, a Manila-based economist at the Asian Development Bank, warns that rising oil prices will push up fuel and transportation costs in the region. “Energy and food prices are moving together very closely,” she said, adding that risks associated with ongoing trade tensions between the U.S. and China also bear watching.

Food costs across Asia can vary considerably, both by item and by country, making an overall reading hard to gauge. Globally, prices are already inching higher. The FAO’s Food Price Index averaged 176.2 points in May to hit its highest level since October. The Cereal Price Index was almost 17 percent higher than a year ago.

Sizable purchases by Southeast Asian buyers kept rice prices firm, according to the FAO. Thai rice prices are up more than 7 percent so far this year and the Philippines has shown strong demand for imported rice.

Nudging Higher

UN FAO food price index at its highest since October

The United Nations’ Food and Agriculture Organization

Yet for now at least, the overall picture in Asia is largely benign.

“Weather has been rather favorable, which means not so much disruption on food supply coming from mother nature, which has traditionally been disruptive for countries such as India, the Philippines, and Vietnam,” said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis Asia Ltd. in Hong Kong.

But unfavorable base effects, higher oil prices, weather risks and weaker currencies mean the cost of imported goods are likely to pick up, she said.

India’s central bank last week described food inflation as muted when it raised interest rates to contain broader price pressures.

In China’s case, food is estimated to make up about 30 percent of the overall inflation basket and is often whipped by pork. Wholesale pork prices have dropped more than 18 percent this year due to excessive supply. A consolidation of China’s pig industry has seen small farms shut due to environmental concerns, while large-scale operations are expanding.

Yet in a sign that pressures can quickly rebound, Indonesia has seen food prices pick up considerably. They climbed 4.5 percent in May from a year ago, following a 5.2 percent gain in April — the fastest pace since December 2016.

With the Federal Reserve all-but-certain to raise interest rates again this week, Asia will continue to face pressure to keep in step or see their currencies weaken. In that environment, contained food prices may not be enough to keep Asia’s central bankers sidelined, but will at least give them more flexibility than they’ve enjoyed in the past.

“Food prices are likely to remain stable over the near term,” according to the UN’s Broca. “But we can’t be sure over the longer term.”

— With assistance by Karlis Salna, Anirban Nag, and Xiaoqing Pi

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