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Thailand, Korea inflation slumps

Reuters | 12/01/2008 8:39 PM

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BANGKOK/JAKARTA - Thailand's inflation plunged in November, giving the central bank scope to join peers from Seoul to Sydney in slashing interest rates, but Indonesia looked set to stand pat after price pressures barely budged there.

Thailand reported on Monday that annual inflation tumbled to a 14-month low, paving the way for its first rate cut in well over a year to join a worldwide easing campaign aimed at averting a deep global recession.

Inflation also fell in South Korea and a key gauge of Australian inflation tumbled, boosting bets of more rate cuts in Asia-Pacific's fourth and fifth-largest economies.

Indonesia, however, saw its headline inflation easing just a notch and still in double digits, too small a move to prompt a rate cut from a central bank worried by dwindling investor confidence that has prompted an outflow of capital and a fall in the rupiah.

The financial crisis that began with a U.S. housing market slump last year and escalated into a global downturn has already knocked much of the developed world into recession, triggering trillions of dollars in rescue packages and several rounds of interest rate cuts.

In the Asia-Pacific, Japan, China, India, Malaysia, Australia, South Korea and others have all cut rates since the crisis took a turn for the worse in September, leaving Thailand, the Philippines and Indonesia as the only holdouts, who have yet to switch to an easing cycle.

Thailand is widely expected to do so this week after it reported on Monday that inflation cooled more than expected to just 2.2 percent from 3.9 percent in October and a decade high above 9 percent in July. Its central bank had raised rates as recently as August.

"The Bank of Thailand will probably have to cut interest rates this time even more than it expected," said Charl Kengchon, economist at Kasikorn Research Center.

Like elsewhere, the sharp drop in commodity prices accounted for much of the decline. But it also coincided with political turmoil that hit business and consumer confidence, dealing another blow to the economy already dampened by the global downturn.

Markets have fully priced in a quarter-point rate cut at the Bank of Thailand's meeting on Wednesday, with a large chance for a bigger cut and more easing ahead, given government warnings the economy may stagnate next year.

In contrast, Indonesia is seen keeping rates on hold until next year out of concern that cuts would further undermine the rupiah, already reeling from fears that it could become the next casualty of a worldwide capital flight from risky assets.

The November report that showed inflation eased marginally to 11.7 percent from 11.8 percent, in part due to sticky domestic fuel prices and a weak rupiah, also gave Bank Indonesia (BI) little ammunition to cut its benchmark rate from 9.50 percent.

"I think BI's main concern is still the rupiah, and next is the loan growth, which in September to October topped 30 percent," said David Sumual, economist at BCA in Jakarta.

Indonesia's rupiah has lost almost a quarter of its value against the dollar since the start of the year.

Steep cuts

For months, growing evidence of slowing growth combined with soaring inflation, fueled by the final leg of a record-breaking bull run in commodities, complicated the policy response to the looming downturn.

But with oil prices now at just over a third of their July peaks and inflation retreating in many areas faster than even the most dovish central bankers had expected, bets are on further monetary policy loosening around the globe.

Australia's central bank is expected to almost certainly slash its benchmark rate by at least 75 basis points on Tuesday on top of 200 basis points of cuts since early September. A bigger move is seen as a strong possibility.

"We suspect a move of 100 basis points is more likely now," said Michael Workman, a senior economist at Commonwealth Bank.

South Korea, whose inflation slowed to 4.5 percent from 4.8 percent in October, is also seen on course for another rate cut after 125 basis points of easing since early October.

In Europe, the European Central Bank is expected to cut rates by 75 basis points, or even a full percentage point, after euro zone inflation fell by the biggest ever margin last month.

Japan, however -- with its rates already close to zero -- is in a bind and braced for a devastating combination of falling demand and prices.

"We are moving to the next phase of shrinking consumption -- some call it deflation -- production going down and prices going down," Economy Minister Kaoru Yosano told the Financial Times.
 

as of 12/01/2008 8:39 PM