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Macroscope | Why Asia’s gradual Covid-19 recovery means it has less to fear from rising inflation
- Countries like the US that went big on economic stimulus are now having to back-pedal just as sharply
- Most Asian countries are entering their post-pandemic phase more slowly, giving supply time to catch up with demand. Plus, forex reserves are sufficient to ease anxiety over currency depreciation
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The aggressive policy tightening by the US Federal Reserve and other central banks in developed economies has made many headlines lately. While some Asian central banks have already begun raising interest rates, their pace has been more moderate.
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Many had assumed that Asian central banks would need to track the Fed closely, or risk currency depreciation and capital outflows. Are monetary authorities in the region behind the curve, and do they risk more trouble in the future?
The short answer is “no”. Asian economies are still highly connected to the US and European economies. However, there are some notable differences that allow Asian central banks to be more flexible in policy normalisation.
Starting with inflation, most Asian economies have seen their headline inflation rising sharply in recent months. This is not surprising, given the surge in both oil and food prices caused by the conflict in Ukraine and the ongoing global economic recovery.
There is not much central banks and monetary policy can do to address this issue. Hence, economists often strip out the food and energy components in inflation, leaving what’s known as core inflation. Even though core inflation has risen across the region, there are only a few economies where this is an immediate challenge, such as India and South Korea.
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