If high fuel prices continue, inflation pressure will force several central banks in Asia to follow the US Federal Reserve in raising interest rates next year, while Taiwan is likely to maintain a neutral stance against a potentially slowing economy, DBS Bank Ltd (星展銀行) said on Friday.
Fuel prices have been rising steadily over the past few months, reflecting the persistent rise in global crude oil prices due to geopolitical risks involving Iran and the US in the Persian Gulf, and because there has been no major output pickup from major oil producers such as Russia and Saudi Arabia, DBS Bank said in a report.
“We see no clear path to resolution in this brewing Iran-US conflict; we think that the risk of matters worsening is far higher than some sort of mitigation in the near term,” DBS chief economist Taimur Baig said in the report.
“Against this background, we devote this weekly [report] to a scenario under which oil averages US$100 in 2019. This would constitute a 35 percent year-on-year price shock to oil importers, a dramatic development, given that it would build on top of a 30 percent year-on-year jump in 2018,” Baig said.
Baig was not alone in predicting that crude prices would return to triple-digit levels last seen in 2014.
Global information provider IHS Markit in August predicted oil prices could potentially reach US$100 per barrel by the end of this year or early next year, amid US sanctions on exports from Iran, OPEC’s No. 3 producer, and lower capacity in Libya and Venezuela due to geopolitical and economic concerns.
DBS’ economics team conducted a country-by-country analysis of the implications for growth, inflation, fiscal, current-account balances and foreign-exchange rates.
“The key stress points in Asia around much higher oil prices will be India and Indonesia, as has been the case this year,” Baig said in the report.
While sharply higher oil prices would pose macro challenges across the board, prompting measured interest rate hikes in Indonesia, South Korea, Thailand and the Philippines, Malaysia would be one unambiguous winner in a bullish commodity price environment, the report said.
As for Taiwan, a 10 percent increase in crude oil prices is expected to push inflation 0.2 percentage points higher, DBS said.
“Thanks to a high comparison base, we estimate that inflation will rise, but remain below the 2 percent mark in 2019 under the scenario of a spike in oil prices to US$100 per barrel,” Ma Tieying (馬鐵英), a Singapore-based economist at DBS Bank, said in the report.
The consumer price index (CPI) last month rose 1.72 percent from a year earlier, while core CPI — which excludes fruit, vegetables and energy items — increased 1.2 percent year-on-year, the Directorate-General of Budget, Accounting and Statistics (DGBAS) said on Friday.
In the first nine months, CPI rose 1.66 percent and core CPI was up 1.40 percent from a year earlier, the DGBAS said.
Ma said a surge in oil prices would depress GDP growth and the business sector would face a profit squeeze due to higher upstream costs.
If corporate profits were to remain weak for several quarters, it would harm household consumption, she said.
“We reckon that GDP growth may fall below 2 percent in 2019 if oil prices stay at US$100 per barrel,” Ma said.
If GDP growth turns mild and the output gap remains negative next year, the central bank might refrain from monetary tightening, despite the risk of economic slowdown due to higher inflation, she said.
“Taiwan’s central bank will face a dilemma on monetary policy,” she added.
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