beyondbrics

While emerging market central banks are now mostly cutting interest rates to boost growth, they are still keeping an eye out for inflation, which is much more of a danger in EMs than the developed world.

So the drop in CPI for Indonesia, South Korea and Thailand on Wednesday was good news for any potential rate-cutters.

The question is: are the falls enough to prompt further easing?

First, the numbers for January, year-on-year, for headline inflation:

Indonesia: 3.7 per cent, down from 3.8 per cent in December
Korea: 3.4 per cent, down from 4.2 per cent in December
Thailand: 3.4 per cent, down from 3.6 per cent in December

What’s behind the falls?

For Indonesia, it’s food: headline inflation in Indonesia has fallen along with the significant drop in food inflation. But this is largely due to the 2010 jump in food prices, which persisted into 2011. In fact, both seasonally adjusted sequential inflation and annual core inflation didn’t show any fall – so the prospects for further inflation falls are limited.

In Korea, according to Ronald Man of HSBC: “the moderation in this month’s reading was riding on the back of a strong high base effect from last year’s foot-and-mouth outbreak in January 2011″. And as Erik Lueth of RBS pointed out, “on a sequential basis both headline and core inflation continued to rise. While some of this may owe to the Lunar New Year, it is too early to call an end to inflation.”

For Thailand, food also played a large part in the fall in the headline figure, but higher energy prices increased transport costs. In fact, core inflation rose marginally to 2.8 per cent.

So what are the prospects for interest rates?

Indonesia has defied analyst expectations in the past with quick cuts in the face of warnings of a global slowdown. The inflation figure may encourage further cuts, according to Lief Eskesen of HSBC: “Combined with the weaker global economic backdrop, the dip in January inflation is likely to further strengthen BI’s inclination to keep it loose and it may even egg them on to consider yet another rate cut.” Don’t rule out another 50 basis point cut.

Korea is more likely to hold, according to Lueth: “[In 2012] Korea should grow at 3.5 per cent. This is not weak enough to warrant interest cuts”. He added that there are no members on the MPC calling for a rate cut, and that Korean president Lee Myung-Bak stated that Korea should ensure prices are kept in control even if economic growth slows.

Equally, don’t expect Thailand to cut either. Rahul Bajoria of Barclays Capital argued in a note: “We do not expect the BoT to reduce its policy rate further. According to the central bank, the recent rate cuts were due to extraordinary circumstances (the severe flooding), and do not indicate that interest rates are on a ‘downward trend’.”

Cut, hold, hold. Perhaps.

Related reading:
Thai inflation falls, follows Asian trend, beyondbrics
South Korean inflation: home-baked, beyondbrics
Caution over easing Asian inflation, FT