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Higher Asia Interest Rates to Fight Inflation, Oil Prices

  • Heda Bayron

As crude trades past $74 a barrel, oil-importing Asian governments are not taking any chances with inflation. Experts say Asian economies will weather high oil prices, but interest rates will have to go up.

The Reserve Bank of Australia raised interest rates by .25 percent to 5.75 percent - the highest in five years. The bank acted as higher oil costs and consumer spending helped push the Australian inflation rate to 3 percent in March.

Economists say higher interest rates will become the norm across oil-dependent Asia as governments try to curb the effect of soaring oil prices on their economies. China and Malaysia raised rates last week.

High oil prices come as most Asian economies are growing strongly - which means strong demand for goods and services. With prices for many assets rising, such as housing, and consumers doing more shopping, there already is some inflationary pressure in the region, no matter what oil prices do.

Inflation has remained moderate in Asia, despite record oil prices. But monetary authorities are worried as crude prices reach new highs.

An economist at Rabobank in Singapore, Jan Lambregts, says foreign exchange rates have helped cushion the impact of costly oil. Most Asian currencies have strengthened moderately against the U.S. dollar this year.

"Also we could argue that Asian countries have been more willing to accept currency strengths so far this year and that has also helped curb inflationary pressure," said Lambregts.

The stronger a currency is against the dollar, the cheaper it is to buy oil. On Wednesday, the dollar continued to weaken against major Asian currencies. The Korean won rose to its highest level since 1997, while the Malaysian ringgit is at its strongest against the dollar since 1998.

Lambregts says global competition is keeping high oil prices from trickling into the broader economy. He notes that wages generally have remained steady.

"We have seen little of that ... because there is simply more competition in the labor market that is keeping costs down," said Lambregts. "At the same time, companies facing global competition have not been able to pass on higher costs from energy and commodity prices easily."

Another reason for the moderate inflation in Asia is that some governments subsidize oil to consumers. But as prices reach new highs, these subsidies drain foreign exchange reserves and governments are coming under pressure to cut them.

Asia imports most of its oil. Many governments have recently encouraged citizens and companies to conserve energy and use alternative fuels to lessen dependency on oil.

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