The rally in oil prices is a potential game changer for inflation in Asia and will pressure central banks to lift interest rates after years of easy money.
With the region’s economic growth already enjoying the tailwinds of an export boom, the ingredients for a pickup in inflation are falling into place.
Food costs can rise in response to higher oil prices, with implications for policy-makers in emerging Asia, where the combined weight of food and energy in inflation gauges averages 38 percent, and is around 50 percent or higher in several markets, according to analysts at Nomura Holdings Inc.
“The implication is that the recent sharp rise in oil prices, if sustained, could be the spark that ultimately impels EM central banks to raise policy rates faster than they would otherwise,” the Nomura analysts wrote in a note.
The impact of sustained higher oil prices will vary from country to country. Oil exporters, such as Malaysia, stand to benefit. Ship-building South Korea could gain if higher oil prices trigger a pickup in orders from the Middle East. Taiwan, with a current account surplus of almost 13 percent of national output, is well-placed to handle any price surge, while Thailand will be cushioned by bumper tourism and electronics exports.
At the same time, an inflation up-tick will boost nominal growth and will be welcomed in a region awash with debt. Record levels of international reserves will allow policy-makers alternative tools to raising borrowing costs.