As world economies recover, worries about inflation are emerging. Besides higher energy prices, there are signs of demand-pull inflation in Western economies as vaccination allows re-openings. However, ASEAN, the South-east Asian nations, is witnessing new COVID-19 outbreaks and imposing new restrictions.

Higher oil prices fed through to consumer inflation in Thailand, Vietnam and the Philippines, Malaysia’s inflation would likely have exceeded 7 per cent without subsidies while Indonesia has used price regulation as a counter-cyclical policy tool.

However, unless energy prices move higher, these risks should be contained. The other main inflation driver is food prices, and while their momentum may be rising globally, Southeast Asia’s situation has actually improved.

Rice is the region’s main staple and prices have subsided sharply after an earlier spike. La Niña risks largely failed to materialise and weather permitted bountiful harvests. In the region’s two largest rice importers, the Philippines’ production rose 9 per cent in the first quarter and Indonesia’s by 27 per cent, probably making imports unnecessary. Meanwhile, production in Thailand and Vietnam, large net exporters, could rise 5 per cent.

The coronavirus resurgence in much of the region has hit near-term growth prospects, especially consumer spending, so should depress core prices in the short term. Before the latest outbreak, there were signs of demand-pull inflation in Vietnam, reflecting its strong recovery and previous virus containment.

However, containing the latest wave may prove more challenging. The region’s vaccination rates are low, making a speedy consumer recovery unlikely. Still, we have revised up our 2021 inflation forecasts for Thailand and Malaysia to 1.4 per cent and 3.2 per cent because of energy prices, but lowered our Philippines and Indonesia forecasts to 4.2 per cent and 2.1 per cent because of food prices.

The outlook removes almost any risk of ASEAN monetary-policy tightening this year. For 2022, much depends on vaccination, which isn’t looking too good, though a 60 per cent-70 per cent rate could potentially be reached in Singapore by September and in Malaysia by January. These economies’ semiconductor and biomedical sectors have ensured the region’s strongest export momentum while fiscal support has supported their labour markets, so they could start tightening policy in the second half of 2022.

An investment boom should help steady recovery in Indonesia next year. Core prices are unlikely to rise too sharply but the central bank will need to consider tightening to offset its substantial asset purchases – probably hiking the reserve ratio late next year, followed by a first quarter-point rate rise.

New pandemic restrictions will delay Vietnam’s recovery, and hence the urgency to raise rates for the first time since 2011. Instead, it may limit credit growth to risky sectors but raise rates in late 2022 if property prices continue rising.

The Philippines’ central bank will be in no rush to hike interest rates next year given the hit to growth expectations this year and a slow vaccination rollout. We don’t expect a hike until early 2023. Poor tourism and sluggish domestic growth make rises unlikely in Thailand anytime in the foreseeable future.

However, while rate rises are unlikely this year, some central banks may consider macroprudential tightening to offset financial stability risks. Singapore did that in 2018 after housing demand surged and a similar boom now could prompt lending controls or higher stamp duty.

First published 28th May 2021.

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