If South Korea raises interest rates on Friday, three of Asia's biggest economies will have tightened policy within a week, challenging the assumption that central banks lack the stomach to combat inflation.
Indeed, with markets pricing in further increases across Asia to anchor inflation expectations, some economists are raising the tantalising prospect that price pressures could peak before long, barring new weather disruptions to food supplies.
Since late 2010, fears that policymakers are dragging their feet on inflation are one reason why investors have pulled billions of dollars out of emerging markets in Asia and elsewhere. Developed markets have outperformed handily.
Last Friday, though, Bank Indonesia, one of the central banks believed to be the farthest behind the inflation curve, raised interest rates for the first time in nearly two years.
China on Tuesday hoisted borrowing costs for the third time in four months. And, although the call is close, a majority of economists expects the Bank of Korea to raise rates for the second month in a row.
P.K. Basu, chief non-Japan Asia economist with the Daiwa Institute of Research in Singapore, noted that the Reserve Bank of India, too, had responded to above-target inflation by jacking up rates last month, its seventh increase since March.
"We're beginning to see central banks respond more appropriately now," Basu said. "As a consequence, I think inflation will become less of an issue by the middle of the year."
DIVERGENT VIEWS
Economists at Goldman Sachs analysed historical precedents and ran econometric models to estimate the passthrough from higher food costs to consumer prices. They concluded that inflation was likely to crest in the coming few months as long as the price of rice, Asia's staple, did not surge.
"While seeing a peak in inflation may be a source of comfort for the market, we think the more meaningful turning point is likely to be when enough policy tightening has been delivered to see inflation move back on a path that is likely to bring it inside the ceiling of an implicit or explicit comfort zone for policymakers," the Goldman analysts said in a report.
There is nothing like a consensus, though, on how much more central banks will have to do.
Rob Subbaraman, Nomura's chief Asian economist based in Hong Kong, also argues that central banks, in their desire to maximise growth, are underestimating underlying inflationary pressures.
Nomura sees rising commodity prices and inflation in China as structural, not cyclical, phenomena. What's more, it calculates that most Asian economies are operating near full capacity — a recipe for demand-side price pressure.
"From this vantage point, a policy strategy of going for growth over inflation is a dangerous one," Subbaraman said.
"The slower the response of market-based monetary policy tightening — that is, interest rate hikes and currency appreciation as opposed to piecemeal administrative measures that tend to lose effectiveness over time — the greater the risk of draconian tightening later on," he wrote in a report,
MOVE YOUR CURRENCIES
Jonathan Anderson, UBS's chief emerging market economist in Hong Kong, is in the more bullish camp.
Measured by money, credit and output, he said only a handful of countries fell into the categories of "heated" or "overheated" — China, India, Brazil and Peru as well as, arguably, Indonesia, Vietnam and Nigeria.
Yet most of these economies have been tightening policy for a while; Brazil, China and India have already done 70-75 percent of the work of stabilising inflationary pressure and are likely to have finished the task by the middle of the year, he said.
As a result, headline inflation in emerging markets could be falling in six months' time. "And if it is not falling, there is a decent chance that it could be stable," Anderson said.
That's not to say all policy settings are perfect, especially when it comes to exchange rates — a subject sure to crop up at next weeks meeting of finance ministers of the Group of 20 major economies in Paris.
Basu at Daiwa praised Singapore for tightening policy promptly by letting its exchange rate rise but said Seoul's resistance to currency appreciation had left the South Korean won "incredibly undervalued", especially against the yen.
This not only creates friction with Japanese exporters that compete with South Korea but fuels at the margin the inflation that the Bank of Korea is expected to address by raising interest rates.
As Federal Reserve Chairman Ben Bernanke told a Congressional hearing on Wednesday: "The inflation is taking part in emerging markets because that's where the growth is, that's where the demand is and that's where in some cases the economies are overheating.
"It's the responsibility of the emerging markets to set their monetary and exchange rate policies in a way that will keep their economies on a stable path."
