Commodity Prices and Monetary Policy in Emerging East Asia During the Global Financial Crisis

Abstract

In the first phase of the global financial crisis, rising inflation was a major concern for emerging East Asian central banks. Coupled with a slowing US economy, regional central banks faced a monetary policy dilemma of either addressing higher inflation or supporting moderate growth. Higher food and fuel prices were the major drivers of headline inflation. Their causes, however, were a confluence of mutually reinforcing cyclical and structural factors. Understandably, different economies faced a different balance of risks between price stability and growth; but to attribute the inflation to supply shocks alone was misleading. This was unsettling given that inflation and inflation expectations were on the rise, and without much credibility, the reluctance of many central banks to raise interest rates risked repeating the mistake the advanced economies made in the 1970s. Without credibility, inflation expectations are unlikely to be well anchored. To gain credibility, a central bank must ‘walk-the-talk’, and understandably it must have the autonomy to do so.