Oil’s Slide Is Good for Asia, But It Comes With a Catch
A selloff in commodities is good news in Asia, where inflation has become a major worry—but not as good as one might think. Tackling inflation has become a top priority for policy makers from Beijing to New Delhi, who have reacted by steadily tightening credit and letting their currencies appreciate against the dollar. Central banks in both the Philippines and Malaysia raised key interest rates 0.25 percentage point on Thursday. Two days earlier, India surprised markets with a half-point rate rise after inflation jumped to nearly 9% in March.
Commodities are a big part of the problem. Announcing its rate increase, Malaysia’s central bank cited expectations that commodity and energy prices would remain high all year. In the Philippines, average oil prices reaching $140 a barrel would push inflation to 5%, up from 4.4% with oil at around $100 a barrel, Barclays Capital notes in a report, citing central-bank estimates.
So central bankers should be sighing with relief as oil continues to push lower following its 8.6% plunge in the U.S. to just below $100 a barrel on Thursday. On Friday, the front-month June contract fell another 2.6% to $97.18, its lowest close since March 18. The week’s 14.7% plunge was the steepest one-week drop since December 2008. The catch is that declining oil prices reflect vulnerability in the broader economic outlook, which isn’t good for Asian exporters. Some of the drop in commodities no doubt comes from investors unwinding positions after a sharp runup in prices. But concerns about the strength of the U.S. recovery linger, despite Friday’s positive jobs report, as do worries about sovereign risk in Europe.