Steady inflation to boost domestic demand, pump prime economy – IIF

MANILA, Philippines - Slow inflation in emerging markets such as the Philippines should allow domestic demand to pump prime their economies even as foreign funds leave on better economic prospects in the US, a group of financial institutions said.

“Lower commodity prices diminish cost pressures and inflation risk,” the Institute of International Finance (IIF) said in its Global Economic Monitor for June.

“While many EMs (emerging markets) face important country-specific policy challenges, domestic demand growth should remain solid, supported by past monetary easing,” it added.

In its report, the IIF said the impending withdrawal of stimulus measures in the United States – as signs of recovery materialize – has “weakened” business sentiment in developing countries such as those from Asia.

For the past week, financial markets have been rattled by pronouncements from the US Federal Reserve that it would begin scaling down its $85-billion bond buying program “later this year.”

For the past five years, the tack known as “quantitative easing (QE)” has flooded the world economy with cheap money, which found their way to emerging markets in search for better yields.

These days, investors are repositioning their portfolios back to the US as the end of QE is seen to result in higher interest rates at home.

However, the IIF said rate hikes from near-zero returns in the US would only occur “in 2015” even as the Fed may taper off QE this year and pull it back by 2014.

“Uncertainty about these issues contributed to the recent market volatility, while economic fundamentals have evolved broadly as expected,” the agency said.

For emerging Asia, the IIF pointed out that as investors leave, high domestic liquidity due to policy easing years back could provide support to specific economies. This, as inflation, remains manageable in most countries.

“The outlook for favorable harvests and the redirection of excess export capacity to home markets should continue to restrain inflation in the near term,” the organization said.

For instance in the Philippines, the IIF noted that inflation has dropped from previous high of 3.8 percent in August 2012 to 2.6 percent in May 2013. Both figures are still within the official of three to five percent.

“The drop in inflation in the Philippines reflects the success of policies in restoring macroeconomic balance,” it said.