BREAKINGVIEWS - Oil's climb raises risk of Asian stagflation

Employees manually fill containers with diesel during a power cut at a fuel station in New Delhi July 31, 2012.

HONG KONG (Reuters Breakingviews) - Oil's rise is an unwelcome setback for a slowing Asia. The price of crude has climbed by a quarter in the past two months. That could stoke inflation in the energy-hungry region and make it harder for central banks to respond by cutting interest rates.

Despite efforts to promote cleaner and closer sources of energy, Asia still depends on imported oil. Japan and South Korea import 80 percent of their energy, according to the World Bank. China now accounts for 11 percent of global oil consumption, second only to the United States.

Brent's 26 percent climb since June 21 raises Asia's energy bill by roughly $650 million a day, an amount equivalent to 1 percent of economic output for a region the International Monetary Fund forecasts will expand by 6 percent this year. While that may sound healthy when compared with the United States and Europe, the risk is that growth in the likes of China, India and Indonesia will be too slow to absorb new entrants into the job market or meet expectations for rising living standards.

More expensive oil may not be entirely bad. Prices are rising in part because investors expect China, Europe or the United States to combat the slowdown by spending more or printing money. If growth fails to respond, weaker demand should eventually reverse oil's rise. Developed countries may also ease the pressure by encouraging producers to boost output, or by releasing reserves, as the Group of Seven industrialized nations threatened earlier this week.

But as long as oil defies economic gravity, Asia's central banks are in a pickle. In theory, relatively high interest rates give them more scope to respond to a slowdown than their counterparts in the developed world. But if rising oil raises inflation, they'll be reluctant to cut rates. India's central bank kept its benchmark rate at 8 percent last month - despite cutting its GDP growth forecast - because inflation is running at 7 percent.

Moreover, greater oil imports will shrink current account surpluses or widen deficits, depressing Asian currencies. In a weak environment, that might reduce the allure of Asian stocks and bonds to global investors, raising borrowing costs and worsening the slowdown. Asian policymakers have to hope oil comes back to earth soon.

CONTEXT NEWS

Finance ministers of the Group of Seven most industrialized nations on August 28 urged oil-producing countries to raise output, while warning that the West was ready to tap strategic oil reserves to offset rising prices.

China's GDP growth for the quarter ended June 30, 2012, slowed to 7.6 percent year on year from 8.1 percent the previous quarter, according to Reuters data. Japan's GDP growth in the same quarter slowed to 0.3 percent from 1.2 percent. South Korea's GDP growth was 2.4 percent, down from 2.9 percent in the first quarter.

The central banks of China, Japan and South Korea have kept interest rates steady since early July. India's central bank on July 31 left interest rates unchanged.

(Editing by Peter Thal Larsen and Katrina Hamlin)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)