Inflation rates are falling across Asia, raising expectations that central banks will lower interest rates to help their economies and ease the region’s high debt burden.
Consumer-price rises are moderating almost everywhere as the cost of oil and commodities like rice, soybean and sugar drop sharply. While prices are falling partly because of abundant global supply, China’s slowing growth is also having a knock-on effect across Asia, reducing demand for the region’s exports.
A pickup in the U.S. economy, a bright spot for demand, is counterbalanced by Europe’s continued troubles. Japan’s fall into a technical recession in the third quarter, meanwhile, could keep prices in the region from rising further.
The risk to Asia is that low inflation becomes entrenched, mirroring Japan’s troubles of recent years and making it harder for companies and households to repay debt, said Chetan Ahya, an economist at Morgan Stanley in Hong Kong. “You’ve got to cut rates to get out of this problem,” Mr. Ahya said.
Countries such as South Korea, India and China could reduce rates next year to take advantage of low inflation, said Deutsche Bank economist Taimur Baig, adding, however, that central banks will be cautious. Pushing rates too low could lead global investors to yank money out of Asian assets, especially if U.S. interest rates begin to rise in 2015.