I had a very interesting conversation with Bijan Aghevli yesterday. Aghevli is Chase's managing director of Asian Economic and Policy Research and a former director of the IMF who was instrumental in the 1997-98 negotiations with Thailand, Korea and Indonesia.
He believes that as growth rates keep growing throughout the region so the economies will return to full capacity. With that, inflation willl start creeping back into the economies and then it will be very difficult for Asian policy-makers to maintain their easy monetary policy and the cheap exchange rates that go with it. So the central bank governors throughout the region will be faced with a stark choice - leave rates unchanged, keeping the currencies low and help maintain the exports-first policy that has helped so many Asian countries dig themselves out of the crisis. Otherwise, the governors will have to raise rates - perhaps quite aggressively - to staunch domestic inflation. In this process, they will have to let their currencies appreciate, so damaging their export sectors.
So far, pretty much textbook stuff. The question is what course of action will domestic Asian politics allow? Bijan's view is that we are blessed in Asia at the moment with some very conservative central bankers. And he believes that their first priority is to quell any inflationary presures.
He recalls conversations he has had with governorsá- both in his role at the IMF and in his recent position at Chase - in which they betray themselves as being particularly averse to inflation. The growing incidence of truly independent central bank governors and the worldwide reduction in inflationary pressures will make sure that no central banker wants to be seen as the one who lets inflation creep back into their economy.
A kind of peer group pressure exists, he believes, among central bankers, and the driving force behind all their decision-making is hatred of inflation. This throws up some interesting scenarios. First, it will be fascinating to watch how the central bankers manage the transition from exchange rate targeting to inflation targeting. Second, there will definitely be some wider policy battles between the hardline Asian export lobby - who will do anything to keep their currencies cheap - and the central bankers who will want to stamp out inflation, even it means a rapidly appreciating currency.
While these scenes are likely to be played out later in the year, once inflation starts creeping back, it will be useful for all to understand that this potential conflict could be very destabilizing for the countries that get it wrong.
