KUALA LUMPUR (April 6): In anticipation of rising inflation, Asian Development Bank (ADB) expects Central Banks in developing Asia to tighten their monetary policy this year even though the inflation outlook for the region remains manageable compared to other regions.

Speaking in ADB’s Asian impact webinar, its senior economist Matteo Lanzafame said Central Banks should start to tighten monetary policy by raising interest rates to fight against anticipated rising inflation as this will help them from falling behind the inflation curve.

“Inflation in developing Asia was softer than in the rest of the world. However, we don't want to send the message that monetary authorities (in this region) can be complacent so they can think that there are no problems. (In fact) Inflationary pressures in the global environment are increasing very substantially,  (as) they are in the midst of a historical increase in commodity prices. So that is something to keep an eye on and to anticipate for Central Banks in developing Asia.

“They don't want to fall behind the curve in a situation we are in right now. It's a global crisis, high energy prices are going to have an impact on inflation sooner or later in developing Asia as well. So monetary authorities really need to anticipate this and be very vigilant,” said Lanzafame.

Abdul Abiad, director of the ADB's macroeconomics research unit, suggested that central bankers address inflationary pressures by taking a close look should inflation become broad-based.  

“I think the key for our central bankers is to look at whether inflation is becoming more broad-based in your economy. It complicates things when you have energy prices and food prices going up so rapidly, but these are volatile components, they go up and they go down. So this is why it is important to focus on the core. The key though, is that it can be shifted very quickly, which is what happened in the US. Initially, it looked like it was just a transport component in the US inflation that was rising, but within a few months, it had broadened to other categories. So that is the same thing that our Central Banks need to look at to what extent is it just focused on energy and food? Or to what extent is it starting to spill over into other categories and also importantly, into wage growth,” said Abiad.

“Even if the (Ukraine) conflict itself sort of reaches equilibrium later this year, the sanctions (against Russia) are likely to stay. In fact, this is the assumption we have that the sanctions are likely to remain over our forecast horizon. Therefore, I would say it is reasonable to assume that commodity prices are going to remain elevated and possibly rise even further,” he warned.

Another major risk that could have an impact on developing nations is the escalation of sanctions against Russia as well as an escalation of war with the involvement of NATO allies.

“The main risk is an escalation of the war particular for example, involvement in the war by NATO countries, which will clearly lead to further increases in energy prices and it will distract trade and global value chains much more than it (Russia’s invasion of Ukraine) has already done. It could very likely lead to a recession in Europe, maybe even (drag) the rate (pace) of the global recovery. So that's probably the worst-case scenario that we can consider in terms of the fallout of war."

Other scenarios that could impact developing nations substantially include an escalation of sanctions against Russia by the European Union especially oil and gas imports, following the EU's decision to ban coal imports on Tuesday (April 5).

"And again, it is very important for developing Asia because the European Union is a very important source of external demand for Asia's exports,” said Lanzafame.

In ADB’s report, entitled 'Developing Asia’s economic outlook 2022', it said inflation in developing Asia stayed below the global trend in 2021 but is expected to rise.

“Inflation in developing Asia this year and next will be driven by continuing recovery and elevated energy and commodity prices. The regional inflation rate is forecast to rise to 3.7% in 2022, before dipping to 3.1% in 2023. Headline inflation is expected to accelerate in all subregions but the Caucasus and Central Asia. Monetary authorities should keep a close watch for incipient inflationary pressures,” it said.

ADB said inflation in developing Asia remained moderate at 2.5% last year because of relatively low food inflation, less severe supply disruptions, and incomplete recovery. Price pressures were less broad-based than in advanced economies, including the US where inflation averaged 4.3%, and emerging economies in Latin America and the Caribbean, and Sub-Saharan Africa, where prices increased by 9.3% and 10.7%, respectively.

Growth in developing Asia will likely be slower this year than previously thought as the war in Ukraine is expected to derail economic recovery in the region still reeling from the Covid-19 pandemic.

The bloc's combined economy, which includes China and India, is projected to expand 5.2% this year, the ADB said, down slightly from 5.3% forecast in December, and sharply lower than the previous year's 6.9% growth.  

For 2023, the region is forecast to grow 5.3%.