Inflation Slowing Across Asia, Giving Room for More Rate Cuts

By Michael Dwyer

Nov. 3 (Bloomberg) -- Inflation is slowing across Asia, giving policy makers in the region scope to reduce borrowing costs to protect their economies from a global slump.

South Korean consumer prices rose in October at the weakest pace in six months, the statistics office said today in Gwacheon. Inflation also slowed more than economists expected in Indonesia and Thailand last month, according to separate reports.

Asian central banks are switching their focus from fighting inflation to bolstering growth as the global financial crisis that has pummeled the U.S. and Europe threatens to engulf the region's export-dependent economies. The Reserve Bank of Australia and the Bank of Korea are both expected to cut interest rates further this week, according to Bloomberg surveys.

``Central banks have room to reduce rates significantly,'' said Ramya Suryanarayanan, an economist at DBS Bank in Singapore. ``Commodities prices are falling and demand is weakening. You will see inflation declining pretty much everywhere.''

Sliding fuel and commodity prices have helped ease inflation across Asia. Crude oil has fallen 53 percent from an all-time high of $147.27 a barrel on July 11 and dropped 27 percent in the past year. Copper and wheat have tumbled more than 50 percent from records this year.

Consumer prices in South Korea rose 4.8 percent last month from a year earlier, moderating from a 5.1 percent gain in September and matching the median estimate in a Bloomberg survey. Prices fell 0.1 percent in October from the previous month.

Emergency Move

The Bank of Korea last week lowered borrowing costs by a record amount, the second reduction in less than three weeks, in an emergency move to restore confidence and revive the economy as stocks and the nation's currency tumbled. Governor Lee Seong Tae hinted at further rate cuts, saying policy makers will pay more attention to the risk of slower economic growth.

South Korea plans to pump an extra 14 trillion won ($10.8 billion) into the economy next year as it steps up efforts to prevent the nation's first recession in a decade, Finance Minister Kang Man Soo told reporters today in Gwacheon.

The Chinese and Indian governments are also spending more as economies across the region weaken. The International Monetary Fund last month forecast the world's advanced economies will expand next year at the slowest pace since 1982, stifling growth in Asia's emerging economies.

Easing inflation in Indonesia and Thailand may give policymakers in Southeast Asia's two largest economies room to pause after raising borrowing costs earlier this year amid soaring consumer prices.

Indonesia, Thailand

Indonesia's inflation rate declined to 11.8 percent in October from 12.1 percent in September, the Central Statistics Bureau said in Jakarta today.

That may give Bank Indonesia room to keep its benchmark interest rate unchanged at 9.5 percent after six consecutive increases in the measure, said economists including Enrico Tanuwidjaja from Oversea-Chinese Banking Corp. in Singapore.

Bank Indonesia's board of governors next meet on Nov. 6 to decide on borrowing costs.

Consumer prices in Thailand rose 3.9 percent in October from a year earlier, the lowest pace in 10 months and below the 4.9 percent median estimate in a Bloomberg News survey.

The Bank of Thailand ``has room'' to ease monetary policy, Governor Tarisa Watanagase said Oct. 24.

Bank of Thailand policy makers, who next meet on Dec. 3, kept the benchmark one-day bond repurchase rate at a 16-month high of 3.75 percent on Oct. 8 after raising it 50 basis points in two meetings since July, when inflation accelerated at the fastest pace in a decade.

`Room To Do More'

Australia's central bank will probably cut its benchmark interest rate by half a percentage point, the third reduction in as many months, amid increasing evidence global financial turmoil is buffeting the economy.

Governor Glenn Stevens will lower the overnight cash rate target to 5.5 percent from 6 percent at 2:30 p.m. in Sydney tomorrow, adding to last month's 1 percentage point reduction, according to 15 of 16 economists surveyed by Bloomberg News.

``Many economies around the region have started to cut interest rates to support domestic demand and that's the right thing to do,'' David Burton, head of the International Monetary Fund's Asia-Pacific department, said in an interview with Bloomberg Television in Hong Kong. ``Because inflation is coming off, there is room to do more on monetary policy.''

China and India, the world's fastest expanding major economies, have cut borrowing costs in the past week.

India, China

The Reserve Bank of India on Nov. 1 lowered its benchmark interest rate for the second time in two weeks, and for the first time in 11 years reduced the amount of money lenders are required to keep in government bonds. China's central bank removed temporary controls over loans to maintain ``relatively fast'' growth, Xinhua News Agency reported Nov. 1, three days after cutting its key rate for the third time in two months.

The Bank of Japan also reduced its key overnight lending rate by 20 basis points to 0.3 percent on Oct. 31 after the Fed last week lowered its target rate for overnight loans to 1 percent, matching a half-century low. Taiwan and Hong Kong also trimmed their benchmark rates last week.

``A global dislocation in economic activity is forcing policy makers to take more remedial action,'' said Mark Cliffe, global head of financial markets research at ING Groep NV in London. ``More policy easing is likely.''

To contact the reporter on this story: Michael Dwyer in Singapore at Mdwyer5@bloomberg.net.