The Asian Development Bank said on Wednesday controlling inflation was the “top priority” for the region as strong growth, turmoil in the Middle East and Japan’s nuclear crisis drive up oil prices.
The Manila-based lender warned some developing economies were showing signs of “potential overheating” and said more flexible exchange rates and capital controls could help curb soaring consumer costs and ease pressure on the poor.
Inflation was likely to hit 5.3 percent this year compared with 4.4 percent in 2010 due to unrest in the oil-rich Middle East and the nuclear disaster in Japan triggered by the massive March 11 earthquake and tsunami, the ADB said.
“Inflation pressures are building and pre-emptive measures may well be needed to avoid overheating,” the ADB said in its 2011 Asian Development Outlook.
It warned higher oil and food prices could “shake developing Asia’s macroeconomic stability” and cause widening income inequality and “potentially lead to social tension”.
Food costs across the region hit record highs in February, the ADB said.
Crude prices surged to two-and-a-half-year highs on Monday with Brent crude topping $120 a barrel for the first time since August 22 on fears the ongoing conflict in Libya and unrest across the Middle East could disrupt oil supplies.
The ADB said growth in Asia’s gross domestic product would likely slow to 7.8 percent this year from 9.0 percent in 2010 as the powerhouse economies of China and India braked slightly.
China, the world’s second-largest economy, was expected to grow 9.6 percent this year compared with a blistering 10.3 percent in 2010 as industrial production and fixed-asset investment eased.
India was tipped to grow 8.2 percent for the fiscal year ending March 31, 2012 compared with an expected 8.6 percent last year.
The ADB acknowledged that managing inflationary pressures was not easy and a “coherent” policy mix was the key to success.
“More flexible exchange rates may be a better policy for countries with persistent current account imbalances and misalignment between their exchange rate and fundamentals,” the ADB said, in a thinly veiled reference to China.
“For countries without such symptoms, relying more on temporary policies, such as capital controls, may be an option.”
China is under mounting pressure from its major trade partners to let its currency strengthen against the dollar, with critics claiming the yuan is grossly undervalued and gives Chinese exporters an unfair advantage.
Economists argue that a stronger currency would help Chinese authorities tame inflation by reducing the cost of imports. Inflation in China hit 4.9 percent in February, well above the government’s four-percent target.
The ADB said a set of economic indicators agreed to by the Group of 20 leading economies in February also could “provide useful tools” for developing Asian economies to deal with inflation and capital inflows.
The indicators are designed to measure economic imbalances between surplus exporters such as China and nations with structural deficits such as the United States.