VINACHEM

The Asian Development Bank saidinflation will put pressure on regional policy makers to manageprice increases even as a faltering global recovery reduceseconomic growth.

The Manila-based lender cut its 2011 growth forecast forAsia excluding Japan to 7.5 percent from an April estimate of7.8 percent, according to the Asian Development Outlook 2011Update report released today. It raised the region’s inflationforecast to 5.8 percent this year, from an earlier estimate of5.3 percent.

Europe’s failure to resolve its debt crisis and diminishingU.S. jobs growth have hurt Asian exports and trimmed expansionsfrom China to Singapore, prompting South Korea, Indonesia, Malaysia and the Philippines to avoid raising interest ratesthis month after boosting them earlier this year. Still, policymakers need to be prepared for greater volatility in capitalflows and the persistent threat of rising prices, the ADB said.

“Inflation is a continuing concern,” the ADB said in astatement accompanying the report. “If commodity prices resumetheir climb and the current weakness in the global recoveryturns out to be temporary, regional central banks will have tospeed up the process of monetary tightening, especially whereinflation is already high.”

All of Asia’s 11 most-traded currencies have fallen againstthe dollar in the past month as slowing expansion damped theappeal of the region’s assets. The MSCI Asia-Pacific Index ofregional stocks has lost about 14 percent this year.

Growth in Asia excluding Japan will be 7.5 percent nextyear, the ADB forecast, down from an earlier estimate of 7.7percent. The lender kept its 2012 inflation forecast at 4.6percent. Crude oil has fallen about 11 percent in the past sixmonths.

Balancing Act

“While cooling somewhat, inflation next year is forecastto stay relatively high, at 4.6 percent, with large variationsacross countries,” the ADB said.

Asia is balancing the need to support the region’s growthwhile containing price pressures. China’s Premier Wen Jiabaoreiterated last month that stabilizing prices remains thenation’s top priority while central banks in Malaysia and thePhilippines signaled last week the risks to their economies haveincreased as they kept rates unchanged.

Job growth in the U.S. unexpectedly stagnated in August,with payrolls data showing the weakest reading since September2010. Italy’s bond-yields have surged as the region’s sovereigndebt crisis spread from Greece, the first to receive a EuropeanUnion-led bailout. Prime Minister Silvio Berlusconi’s governmentrushed a 54 billion-euro austerity package to convince the European Central Bank to buy its debt.

Capital Flows

Asia’s policy makers need to prepare for more volatilecapital flows as the global risks threaten investor appetite foremerging-market assets even as the region’s still “robust”economies may lure funds, the ADB said, suggesting more flexibleexchange rates, temporary capital-control measures, and improvedfinancial supervision.

“Imposing selective and carefully designed temporarycapital control measures that are conducted in a regionallycoordinated manner could be part of the policy mix,” the ADBsaid. “More flexible exchange-rate regimes could also help toprovide an automatic filter to fend off speculative short-termcapital inflows.”

East Asia, which includes China, South Korea, Hong Kong, Taiwan and Mongolia, will be the fastest growth region of Asia,the ADB said.

China will expand 9.3 percent this year, less than theprevious forecast of 9.6 percent, after growth moderated due tomonetary tightening to curb inflation and weaker external demand,the lender said. India’s economy will grow 7.9 percent in theyear ending March 31, compared with the earlier estimate of 8.2percent, it said.