Column The Asian tightening

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: stability are being targeted, with only one policy instrument, interest rates. Recapitalisation and restructuring of financial sectors have been left to market forces, with government intervening merely to limit the systemic risks created by unfolding market events. As a result, financial fragility lingers on and this limits the ability of central banks in advanced economies to tighten policy enough to lower inflation.

For Asian central banks, looser monetary conditions in advanced economies could make the task of containing inflation more complicated. That is because, as a result of years of liberalisation of capital accounts and domestic financial markets, monetary conditions in the region tend to be influenced by monetary conditions in advanced economies, especially the US.

Of course, the degree of influence of the US monetary policy varies across countries—in Singapore and Hong Kong, two regional financial centers, onshore interest rates fully reflect foreign interest rates adjusted for currency expectations. At the other extreme, China still has stringent capital controls and undeveloped capital markets. As a result, US monetary policy tends not to have a large impact on Chinese monetary conditions. India is somewhere in between these two polar cases: capital inflows and outflows have increased to 96% of GDP in FY08 from 15% 10 years earlier but India maintains an array of capital controls that limits the transmission of US monetary conditions to the Indian economy.

The global economic backdrop remains inflationary: while broad commodity price indices have been falling by about 10% in July, this follows an increase of 31% since the beginning of 2008. And oil prices, that were one of the key drivers of the July commodities price decline, have been stabilising over the past week. Even after a downward revision last month the IMF still projects global growth at 4.1% this year and that most important driver of commodity prices, emerging market growth, at 6.9%.