International | Sep 11 2008
By Chris Shaw
While inflation remains an issue in a number of economies around the world it is quickly becoming less of one in China. The inflation rate for the year to August fell to 4.9%. This outcome was well below market consensus of a 5.4% increase, and as TD Securities global strategist Stephen Koukoulas points out, it was a long way from the peak of 8.7% seen in February this year.
In his view, the outcome was the result of a mix of tighter domestic policy, a stronger exchange rate and falling external demand on the back of weaker consumption in Western World economies. He expects further falls in China’s inflation rate in coming months, suggesting a return to a rate of 2-3% by early in 2009 is possible, particularly as monetary policy is still relatively tight.
Danske Bank also sees lower inflation in coming months as likely, but suggests it has been and will be due primarily to a normalisation of food prices after they spiked higher earlier this year. The group suggests this process will be ongoing for at least a few more months, as food prices have further to fall. The upside is this all increases the likelihood the Chinese economy enjoys a soft landing post its recent period of very strong economic growth, as lower inflationary pressures mean more scope for policymakers to focus on maintaining or stimulating growth.
While the bank doesn’t expect any aggressive changes given inflation remains somewhat of a threat, it does see scope for some initial moves to ease current credit restrictions and to slow the pace of the appreciating currency, with fiscal policy changes likely to be held back unless further growth stimulus is needed.
Koukoulas agrees and also considers likely some easing in lending restrictions, cuts to deposit rates and a slowing or reversal of the recent currency appreciation. This has implications for the rest of the world, as he notes lower inflationary pressures in China may help it return to exporting deflation, which would ease inflationary pressures elsewhere around the globe.
By removing some of the world’s inflationary pressures, Koukoulas suggests the risk in the coming 12 months for commodity prices is now to the downside, while it would potentially be a positive for global growth, as it would free up central banks such as the European Central Bank, the Bank of England and the Reserve Banks of Australia and New Zealand to lower interest rates.