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Higher oil prices will challenge regional governments to make “difficult decisions” on inflation, said Albert Park, chief economist on the Asian Development Bank.
Most Asian economies are oil importers like Indonesia and Central Asian countries, Park said. In consequence, the recent abrupt cut in OPEC+ oil production could lead on to higher prices, the economist added.
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“With OPEC oil prices rising and expected increasing demand from China, oil prices could surpass our $88 forecast,” Squawk Box Asia told CNBC on Tuesday.
“This is able to put pressure on the region as the upper price of oil obviously increases production costs. In addition they increase inflationary pressures.”
This puts “quite a lot of pressure” on regional governments to make “difficult decisions about trying to regulate inflation and support economic recovery,” the economist added.
On Sunday, several OPEC+ members said they’d voluntarily cut an additional total of 1.16 million barrels per day of production, whatever the broader block’s mining strategy.
It comes nearly six months after OPEC and its allies made that call reduce production by two million barrels a day.
Moderate inflation
Park said inflation within the region was “moderate”. But he added that core inflation rates, which remove volatile food and energy prices, are “still higher than normal” in lots of Asian economies.
“Monetary authorities have to be vigilant, and we still may not see an end to high rate of interest hikes within the region,” Park said. “But they’ve actually slowed down significantly.”
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Inflation is anticipated to ease this 12 months and next, steadily approaching pre-pandemic levels, the ADB said in its regional outlook report released on Tuesday. Headline inflation is projected to fall to 4.2% in 2023 and three.3% in 2024, down from 4.4% last 12 months.
“While higher rates of interest and still elevated commodity prices are expected to shape the inflation outlook within the region, headline inflation should remain the identical this 12 months in East Asia and fall in other sub-regions,” the report said.
Impact of reopening China
The outlook for Asian economies has improved since China reopened and moved away from strict Covid restrictions last 12 months, the ADB said.
Growth in emerging Asia is anticipated to be 4.8% in 2023 and next 12 months, with South Asia projected to grow faster than other regions.
“Before China abandoned its zero Covid policy, our growth forecast for China this 12 months was 4.3%, but on this announcement we raised it to five%. Park said.
“If the Chinese consumer comes back, it would be superb for the region. China, after all, is the last word source of demand for a lot of goods produced within the region.
More importantly, the Chinese economy is increasingly “embedded in global value chains within the region,” he added. “No risk of lockdown in China really frees up supply chains, and that may very well be a boon” for the region.
However the ADB warned there have been “immediate and emerging challenges” that might proceed to carry back the region’s recovery.
“The recent banking turmoil in Europe and the US indicates that financial stability risks have increased. Policymakers should remain vigilant within the post-pandemic environment of upper rates of interest and debt,” the bank’s report said.