Statistical Yearbook for Asia and the Pacific 2012
 
   
G. Economy
 
G.3. Monetary measures

Monetary policy is a set of measures or actions implemented by central banks to manage the size and growth of the money supply, usually with the aim of maintaining price stability. It influences investment decisions and expectations about economic activity, inflation,1 asset prices and exchange rates with other currencies. The present topic sheds light on how countries in the Asian and Pacific region have used monetary measures to mitigate the effects of the world economic crisis that began in 2008.

There was an increasing trend in the inflation rate between 2010 and 2011 as a result of strong demand-pull inflation, coupled with supply-push cost rises, especially for food and fuel.

The Asian and Pacific region saw an increasing trend in the inflation rate between 2010 and 2011, as was the case worldwide, driven by high global food and oil prices, as well as strong domestic demand leading to higher core inflation. Excess liquidity created by loose monetary policy in the developed world in the aftermath of the economic crisis of 2008/09 also contributed to a rise in consumer prices.

Global food prices remained at almost record levels and oil prices increased to levels not seen since the onset of the world economic crisis due to non-demand related factors, such as political instability in major oil producing countries.2 The impact of inflation on poorer groups would be more marked, as they typically face a higher consumption-income ratio and swifter price increases.

In East and North-East Asia, consumer prices climbed rapidly in 2011. At the country level, consumer prices shot up across the subregion except in Mongolia, where inflation decelerated slightly from 10.1 per cent in 2010 to 9.5 per cent in 2011, while Japan continued to experience deflation of 0.3 per cent in 2011.

In South-East Asia, the inflation rate accelerated in nearly all economies in 2011. In addition to its relatively robust economic outlook and high global commodity prices, persistent inflationary pressures were further fuelled by natural disasters damaging agricultural crops and the depreciation of national currencies, which induced inflation amid renewed global uncertainties.

Figure G.3-1
Inflation rates, Asia and the Pacific, 2010 and 2011

Figure G.3-1 Inflation rates, Asia and the Pacific, 2010 and 2011Consumer prices continued to remain stubbornly high in South and South-West Asia despite some signs that the inflation rate was decelerating in a few economies. This was the case in India and Pakistan, where the inflation rate decreased by 3 percentage points and 2 percentage points, respectively. The inflation rate in India turned around in 2012, while Pakistan continued to see a decrease. The rate of increase in global commodity prices slightly eased in 2011, but the levels remained high, especially for crude oil. The large budget deficits and depreciation of domestic currencies in some countries further contributed to inflation through increased prices of imported goods.

In North and Central Asia, inflation rose in all economies except Armenia. The impact of domestic food inflation has been especially drastic, as food comprises about half of the consumption basket in the economies of the subregion, some of which are highly dependent on imported food. The Russian Federation, which has a large impact on other economies in the subregion through trade, investment and remittance channels, experienced a rapid increase in the inflation rate from 6.9 per cent in 2010 to 8.4 per cent in 2011. It then decreased to 5.1 per cent in 2012.

Figure G.3-2
Inflation rates by subregion, Asia and the Pacific, 2010 and 2011

Figure G.3-2 Inflation rates by subregion, Asia and the Pacific, 2010 and 2011The Pacific subregion experienced a rising inflation rate in 2011, with the exception of Vanuatu. The increasing inflation rate was the case for both developed and developing economies (for which data are available) in this subregion.

Increased inflationary pressure led central banks in many countries to augment their discount rates, and, in some countries with slowing economic activity, policymakers faced the dilemma of either supporting the domestic economy or fighting inflation.

Discount rates (interest rates charged by central banks on short-term loans to commercial banks and other financial intermediaries) are generally determined to manage the pace of economic growth and the presence of inflationary pressures. Difficult policy trade-offs may be involved in determining discount rates, especially when inflation is driven by external factors. With inflation remaining relatively high in some countries in the region due to domestic factors, and with concerns about global commodity prices, policymakers in the region faced the dilemma of maintaining price stability at a time of slackening growth resulting from the uncertain global economic environment.

Figure G.3-3
Central bank discount rates, Asia and the Pacific, 2011 and 2012

Figure G.3-3 Central bank discount rates, Asia and the Pacific, 2011 and 2012The concerns about growth prospects and already high inflation resulted in mixed responses in discount rates in Asia and the Pacific. In 2012, of the 27 countries for which data are available, the central bank discount rate was raised in 12, reduced in 6, and remained unchanged in the other 9. The most significant hikes were in Mongolia (where it continued to increase in 2012), in Turkey (where it took a downturn in 2012, while the inflation rate climbed to nearly 9 per cent) and in Viet Nam. Modest reductions, on the other hand, took place in Pakistan (where the downward trend continued in 2012, in line with the decreasing inflation rate) and in Fiji. Japan has been maintaining its rate of deflation steadily at 0.3 per cent since 2008.

Central banks need to find their preferred inflation-growth combination, taking into account the prevailing sociopolitical situation and accepted levels of inflation. Other factors that may be taken into consideration include the size of the fiscal deficit and the cost of servicing it. Decision makers must consider the time lag related to monetary policy.

Many countries in Asia experienced currency depreciation in 2012.

Many Asian currencies depreciated against the United States dollar in 2012, as the dollar somewhat rebounded, benefiting from the country’s better outlook for growth than that of the eurozone economies, coupled with the currency’s continued standing as a safe haven in times of market uncertainty. The sluggish growth prospects of Asia and the Pacific and the deterioration in external balances, especially in South Asia, also contributed to currency depreciation.

Figure G.3-4
Change in average exchange rates against the United States dollar, Asia and the Pacific, 2012

Figure G.3-4 Change in average exchange rates against the United States dollar, Asia and the Pacific, 2012The currencies of 19 out of 40 countries for which data are available depreciated by 1 per cent or more against the United States dollar in 2012. The most appreciated currencies in 2012, relative to the period averages of the previous year, include the Papua New Guinean kina, the Solomon Islands dollar and the Philippine peso. Prominent among countries that experienced a depreciation of their exchange rates in 2012 were Bangladesh, Bhutan, India, the Islamic Republic of Iran, Nepal and Sri Lanka, with a depreciation of more than 10 per cent in each, reflecting their deteriorating external balances. All of these countries also sustained a high level of inflation over the period 2010-2012. The average annual exchange rates of Australia, Azerbaijan, Fiji and Kiribati remained unchanged against the United States dollar in 2012. Hong Kong, China and Macao, China maintain quasi-fixed pegs between their currencies and the United States dollar and therefore experienced almost no change. Maldives broke its peg to the United States dollar in 2011, and its currency depreciated by over 14 per cent by the end of that year (the inflation rate rose rapidly from 6.2 per cent in 2010 to 11.3 per cent in 2011) and then regained its strength, demonstrated by a 5 per cent increase in its average exchange rate in 2012.

The Federated States of Micronesia is the only Asian and Pacific country to use the United States dollar as its national currency.

Further reading

ESCAP. Economic and Social Survey of Asia and the Pacific 2012: Pursuing Shared Prosperity in an Era of Turbulence and High Commodity Prices (United Nations publication, Sales No. E.12.II.F.9). Available from www.unescap.org/pdd/publications/survey2012/download/Survey_2012.pdf.

Technical notes

Inflation rate (percentage per annum)
The rate of increase of the level of prices during a given period. It is the percentage change in the consumer price index between two points in time. Aggregate calculations: Weighted averages using household consumption expenditure component of the GDP as weight. Missing data are not imputed.

Central bank discount rate (percentage per annum)
The rate at which the central bank lends or discounts eligible paper for deposit money to banks; typically reported on an end-of-period basis.

Average exchange rate (national currency per United States dollar, percentage change per annum)
Units of national currency required to purchase one United States dollar, usually representing the period average. For some countries, midpoint rates, or the average of buying and selling rates, are used. The average annual rate of change in the exchange rate of the national currency against the United States dollar for the period indicated. A positive value means that the national currency has weakened, whereas a negative value indicates a stronger national currency. Rates of change over several years are calculated using the arithmetic growth model.

Sources

Source of inflation data: International Monetary Fund (IMF), International Financial Statistics (available fromhttp://elibrarydata. imf.org/). The data series are compiled from reported versions of national indices. Variation is wide between countries and over time in the selection of base years, depending upon the availability of comprehensive benchmark data that permit an adequate review of weighting patterns. The series are linked by using ratio splicing at the first annual overlap; the linked series are shifted to a common base period 2005=100. Data obtained: 7 May 2013.

Source of central bank discount rate data: IMF, International Financial Statistics. Data are reported by countries. Data obtained: 7 May 2013.

Source of average exchange rate data: IMF, International Financial Statistics. IMF maintains a database of official exchange rates from countries. IMF is normally provided with rates as currency units per United States dollar by the issuing central bank. Rates are usually reported for members whose currencies are used in IMF financial transactions. Data obtained: 7 May 2013.

____________________
1 For the present topic, the rate of inflation is the annual percentage change in the consumer price index, referring to the prices of selected goods and services for a given population.
2 ESCAP estimates that, if oil prices were to increase by about $25 a barrel from their already elevated levels for an extended period, inflation in developing economies in the Asian and Pacific region would increase significantly, by 1.3 percentage points on average. See ESCAP, Economic and Social Survey of Asia and the Pacific 2012: Pursuing Shared Prosperity in an Era of Turbulence and High Commodity Prices (United Nations publication, Sales No. E.12.II.F.9). Available from www.unescap.org/pdd/publications/survey2012/download/Survey_2012.pdf.
 
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