Why Asia’s central banks should worry less about inflation and more about debt

Central banks have long used inflation expectations to set policy, including interest rates, but some analysts wonder if Asia’s policy makers should have bigger fish to fry.

Michael Heise, group chief economist at Allianz, noted last week that Asia’s economies have seen a solid recovery.

“Trade is one reason why the Asian economy has recovered. The other reason is a little more problematic and it’s the credit cycle,” he said, pointing to an “enormous” debt build-up across the region, including China.

He noted that between 2007 and 2016, private sector debt, including households and non-financial corporates, rose by around 90 percentage-points of gross domestic product (GDP) in China and around 70 percentage points in Singapore.

“In the short term view, this was good news as it prevented the halt of demand and the weakness of the economies, but in the long term, it raises the question, is it sustainable,” Heise asked. “Monetary authorities worldwide should start giving more weight to the issue of financial stability in contrast to pure inflation,” he said.

Inflation globally has remained muted, despite policy makers’ best efforts to goose it higher with low interest rates and, in some cases, quantitative easing (QE) programs.

In the U.S., the consumer price index for fell 0.1 percent on-month, but rose 1.9 percent on-year, skirting the U.S. Federal Reserve’s 2 percent inflation target. A continuing slump in oil prices has dampened consumer prices, with U.S. West Texas Intermediate (WTI) hitting a seven-month closing low on Monday, according to Reuters data.


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