Expansion fears put price worries on hold

Concerns in emerging markets about climbing prices have suddenly taken a back seat to worries of economic growth.

Retail prices may ease slightly in the coming weeks as the values of traded commodities like oil, corn and soybean take a nosedive.

Concerns in emerging markets about climbing prices have suddenly taken a back seat to worries that economic growth could slow dramatically. The shifting sentiment has been apparent in the large amounts of cash the UAE has poured into the banking system in an attempt to keep lending from contracting, and yesterday the Indian central bank did an about-face and lowered interest rates. The cut to the Reserve Bank of India's (RBI) repo rate effectively backtracked on three rate hikes in June and July aimed at fighting inflation in Asia's second-most-populous country. The repo rate is the discount rate at which a central bank buys back government securities from commercial banks.

China, the most populous country and Asia's second-largest economy behind Japan, moved to cut interest rates in the middle of last month and brought through a second rate cut on Oct 8. The reason behind the change: emerging economies once thought to be insulated from the fallout of the global financial crisis are now feeling the effects. "It has taken us a little by surprise - not that the measures were not required, but the speed and extent of those measures," said Mridul Sagar, the chief economist at Kotak Securities in Mumbai. "But these are extraordinary times and the government is doing everything possible to keep the economy going."

It is not as if inflation has gone away. From tomatoes to toothpaste, the cost of basic products at supermarkets in the UAE continues to climb - in some cases more than 50 per cent in recent weeks - despite a drop in the price of several commodities. At the Abu Dhabi Co-operative Society, for example, one kilogram of Jordanian tomatoes cost Dh3.60 (US$0.98) on Oct 6, up from Dh1.95 in April, according to figures released last week by the Ministry of Economy. One kilogram of Indian dry red onions at Carrefour in Abu Dhabi increased from Dh0.35 in April to Dh1.55 last week, while Lulu Dubai was selling one kilogram of locally grown short cucumbers for Dh1.45 on April 21 - and for Dh4.95 on Oct 6.

After peaking at 12.9 per cent in August, India's inflation rate fell to a four-month low of 11.44 per cent in the week to Oct 4, still more than double the RBI's five per cent target. However, with oil prices sinking to below $70 per barrel, from a peak of $147 in July, the price of many commodities has also taken a nosedive. Last week, both corn and soybean prices had fallen by nearly 50 per cent from record highs earlier this year. Wheat has dropped 58 per cent since reaching a record $13.50 a bushel on Feb 27, while rice, a staple for many worldwide, is at about $735 per tonne, down from the record $1,038 per tonne for the benchmark Thai 100 per cent grade B, set on May 21.

Those falls will not translate immediately into lower prices, but the upwards pressure on prices will likely diminish over time. "It will take three to four weeks before those products hit the shores and I can pass them through the system at a reduced price - and the same as when prices go up," said Jannie Holtzhausen, the chief executive for Spinneys in Dubai, adding that he expected prices to ease slightly in the coming weeks.

Indian central bankers looked at similar commodity price falls and drew similar conclusions. The cuts should keep India's economy growing at above seven per cent, a welcome result for the Congress Party, the leading party in the ruling United Progressive Alliance coalition, as it prepares for a national election early next year. The finance minister Palaniappan Chidambaram called the rate cut "consistent with our objective to moderate inflation as well as ensuring satisfactory growth".

DK Joshi, the chief economist at India's Crisil ratings agency, said: "Inflation is still a focus, but financial stability seems to have taken precedence. We were anticipating interest-rate cuts at the start of next year, when they have a clear trend on inflation. But at this point everybody wants to be safe rather than sorry." [e-mail]