Asia inflation, exports point to rate cuts

SEOUL Mon Feb 2, 2009 10:45am GMT

SEOUL (Reuters) - Further signs of the global slump in demand and falling inflation in Indonesia, South Korea and Thailand cleared the way on Monday for more interest rate cuts to help Asia's export-dependent countries through the economic crisis.

Central bankers across Asia have slashed borrowing costs sharply to fight what for many countries is the worst economic malaise in decades because they so heavily depend on the likes of the United States and Europe, which are mired in recession, for their exports demand.

Exports figures on Monday from South Korea, India and Indonesia provided more milestones on the slump in demand and falling inflation offered comfort for central bankers to try to get borrowing costs down to revive their economies.

South Korea reported a record one-third fall in exports in December from a year earlier.

Indonesian exports in December dropped by a fifth from a year earlier, the sharpest fall in seven years.

India said its exports fell a much more modest 1.1 percent in December from a year earlier, but that was the third straight month of falling sales.

The statistics added to those from export juggernauts Japan, which has already reported its exports dropped a record 35 percent in December and China, where exports have fallen for two straights months to underline the weakness of global demand.

In Korea, the consumer price index rose a slower-than-expected 3.7 percent in January from a year earlier, the weakest pace of price growth in 11 months.

"With the export data and other recent indicators, the Bank of Korea is more likely to cut its key interest rate by 50 basis points, rather than 25," said Kim Jae-eun, an economist at Hana Daetoo Securities.

The Bank of Korea has more than halved its base rate in just four months to a record-low of 2.5 percent to try to stave off a recession this year, which would be its first since the Asian financial crisis a decade ago.

In Thailand, consumer prices fell for the first time in nearly a decade, down 0.4 percent.

The central bank is forecasting that consumer prices could drop as much as 1.5 percent for the whole year, but economists said a deflation scenario, or a sustained fall in prices, was unlikely because the cost of food and oil was expected to pick up again in the second half of the year.

In December and January, the Bank of Thailand cut its benchmark rate by a combined 175 basis points to a four-year low of 2.0 percent. Its next monetary policy review is on February 25.

"We are still of the view that the policy rate will reach 1 percent by the end of the second quarter," said Usara Wilaipich, an economist at Standard Chartered Bank.

Indonesia's annual inflation in January was in single-digits for the first time in nine months with the consumer price index climbing a lower-than-expected 9.17 percent from a year earlier.

Analysts expect Bank Indonesia (BI), the central bank, to cut its key rate by half a percentage point to 8.25 percent at its meeting on Wednesday to support growth.

"There is always room for the central bank to cut its rate by more than 50 basis points, but I don't think BI will be reckless and a 50-basis-point cut is already more aggressive than their usual cut of 25 basis points," said Eric Alexander Sugandi, an economist at Standard Chartered Bank.

(Additional reporting by Asia bureaus: Writing by Jan Dahinten; Editing by Neil Fullick)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.