Following the Cabinet’s announcement last week that it will raise domestic fuel prices next month and electricity rates in July in response to soaring global oil prices, policymakers sent a clear message that they wanted to rely on the market mechanism to set prices.
The new government, which vowed to rebuild the nation’s economy after taking office, said it was not wise to use price controls to contain inflationary pressure at the expense of state oil and utility companies who are incurring mounting losses.
Despite subsidies for low-income wage earners and public transportation, what the new government didn’t say explicitly was how it is going to ward off the ripple effect from the hikes on the prices of daily necessities and in turn on already weakened consumer spending.
The reason that policymakers didn’t give a clear answer is perhaps because they are torn between achieving economic growth and combating inflation, a situation shared by many other Asian countries.
The little tigers are an example of this. Singapore has raised its inflation forecast for the year for the second time — and warned that rising consumer prices pose a far greater threat than slowing growth — after its annual inflation rate hit a new 26-year high of 7.5 percent last month.
In South Korea, with inflation surging to a four-year high of 4.1 percent last month, the central bank warned on Friday that economic growth would fall short of its forecast of 4.7 percent this year.
As for Hong Kong, its official inflation data showed on Thursday that consumer prices rose 5.4 percent year-on-year last month and economic growth should weaken to between 4 percent and 5 percent this year from 6.4 percent last year.
President Ma Ying-jeou’s (馬英九) administration said it would try hard to keep the economy from slowing down by using its extra budget of NT$114.4 billion (US$3.747 billion) to boost domestic demand.
But the remark by Council of Economic Planning and Development Chairman Chen Tian-jy (陳添枝) last week — that average inflation might hit 4 percent this year, the highest since 1995 — showed that high prices are posing a threat to the government’s economic growth target.
As the global economic outlook weakens because of lingering financial market turmoil, the new government is targeting economic growth of 5 percent this year, which is already lower than last year’s 5.7 percent growth and the 6 percent growth Ma promised during his election campaign.
Moreover, with food and raw material prices soaring and crude oil surging to more than US$135, the central bank is caught in a dilemma between needing to raise interest rates to restrict inflation and to loosen monetary policy to boost economic growth at home.
The latest economic data released on Friday indicated that annual growth in export orders slowed in the first four months of the year because of the NT dollar’s appreciation and higher oil and raw material costs. Against this backdrop, the central bank must decide whether it favors a stronger local currency to attract capital inflows or a weaker one to spur export growth.
Ma came to power with a clear mandate and he should be cautious about failing to honor his election promises. Faced with a glum global outlook and the complications of this at home, his administration will have to work fast and adroitly to sustain his high approval rating.