Asia inflation offers some hope worst may be over

SINGAPORE (Reuters) - Inflation scaled a 17-year high in Australia and held at a 26-year record in Singapore, but the data, combined with a drop in oil prices, offered a glimmer of hope that the worst of the inflation storm may soon pass.

Economists, however, say it is too early for policymakers to drop their guard given the risk that past hefty price increases can still translate into increased wage demands and a lasting upward shift in inflation expectations.

Singapore data on Wednesday showed June inflation at 7.5 percent, below a market forecast of 8.0 percent, while Australia's 4.4 percent second-quarter core annual inflation rate matched market and central bank expectations.

With both economies cooling off rapidly, analysts were convinced consumer price inflation -- fuelled by soaring crude and food prices -- had peaked and no further policy tightening was in store.

"There is little doubt that the economy is flirting with recession, and, because of that, there is little doubt that inflation has peaked," said Stephen Koukoulas, global head of economics at TD Securities in Australia.

A $20 retreat in oil prices from a record above $147 a barrel earlier this month also helped brighten the inflation outlook.

Malaysia is expected to report later in the day its inflation spiked to 6.8 percent in June from 3.8 percent in May.

But with most of the spike attributed to a rise in official fuel prices, analysts are not sure the jump will be enough to prompt the central bank to raise rates for the first time in three years when it meets on Friday.

Monetary authorities in Australia and New Zealand have tightened rates aggressively when their economies were booming.

Now with their rates among the highest in the industrialized world at 7.25 percent and 8.25 percent respectively, economists expect the next move in both countries to be a cut.

CATCH-UP

While rates in Australia are expected to stay on hold for several months, some analysts believe New Zealand authorities may cut rates to help the economy avoid a recession as soon as on Thursday, when they review policy.

However, several countries may be still playing catch-up because they waited for too long to respond to the inflation threat, as the Asian Development Bank pointed out in a report on Tuesday.

"There are growing signs that inflation expectations are beginning to drift, with second-round price effects beginning to burrow through the region's economies," the ADB said.

On Wednesday, Philippine and Indonesian central bankers admitted they may have to act again, having both raised their key rates by 75 basis points this year.

"Given the current inflation environment, and given that there are still risks to the outlook, interest rate hikes cannot be ruled out at this point," Philippine central bank Governor Amando Tetangco said.

Both countries were still cutting rates last year when prices started creeping up and inflation in both countries is running at more than 11 percent, well above their benchmark interest rates.

Indonesian central bank deputy governor Hartadi Sarwono, however, said gradual, moderate tightening should do the trick.

"A gradual increase is enough looking at inflation. If inflation recedes, we will stop and we will not have an aggressive monetary policy," Sarwono said.

In South Korea, where inflation spiked to a near 10-year high of 5.5 percent in June, the government and the central bank seem at loggerheads over what should be done to rein in prices.

The authorities have sought to contain imported inflation by intervening heavily to prop up the local currency. But the central bank has primed markets for the first interest rate rise since August 2007 by saying exchange rates alone can not do the job and that tackling inflation was its prime mission.

Yet Finance Minister Kang Man-soo warnings that Asia's fourth largest economy was in its worst shape since the 1997 Asian financial crisis and insistence rate increases were ill-placed to deal with oil-fired inflation, made markets scale-back rate rise bets this week.

South Korea is expected to report its weakest economic growth in 3-½ years on Friday, when it publishes second-quarter GDP data.

(Reporting by Koh Gui Qing in Singapore, Wayne Cole in Sydney, Adriana Nina Kusuma and Muhamad Al Azhari in Jakarta and Rosemarie Francisco in Manila; Writing by Tomasz Janowski; editing by Neil Fullick)