been the inflationary pressures facing asia. rise in oil prices towards the end of 2007 and its subsequent surge in 2008 reaching $ 120 per barrel, and the food supply shortages in economies that had approached self sufficiency, are two major problems. oil importing economies are now facing high external current accounts deficits whose stress has resulted in currency depreciation. in other economies, rise in us dollar price of oil has been offset by an appreciation of exchange rates. 19. inflationary pressures and expectation are on the rise as : ( i ) governments allow full or partial pass - through to food and oil prices, ( ii ) core inflation rises due to fiscal pressures magnified by subsidies on food, agriculture inputs and oil products, and budgetary recourse to central bank borrowings, and ( iii ) investors seek safe havens in the commodities exchange markets. the depreciating dollar can also be given its share of blame for the record high price of oil, almost double its price just one year ago ( from $ 63 / barrel to $ 119 / barrel ). given the fast pace of economic activity, it has not taken long for price changes in metals, commodities, and oil to manifest themselves in higher labor costs and increased prices of many finished goods and services. 20. financial turmoil, its fallout and contagion, is by no means the only reason for the global commodity price pressures. it has to be recognized that the current trend in global commodity prices is not a one - off distortion or a cyclical spike. the global commodity prices uptrend reflects growing population stress and is likely to now stabilize at a new and higher level. food prices hike is driven by multiple factors, key among which are : ( i ) rising population and consumption demand including the china and india factor, ( ii ) low and stagnating yields, and ( iii ) farmers switching to crop production for bio - fuels. larger debate and financing support to resolve the food crisis is likely to rejuvenate food production, albeit with a lag. 21. policy responses of central banks. as highlighted above, the first round effects of the financial market turmoil were largely contained in asia, given their limited direct exposure to the sub - prime mortgage and other asset based securities. with grimmer economic outlook and concerns regarding financial stability, both at the home front and globally, fed, boe and ecb are taking steps to ease monetary policy through liquidity support and lowering interest rates to avert

recessionary tendencies from permeating deeper. asian countries face a different set of challenges, though, like developed countries, they have the difficult task of striking an adequate balance between growth and inflation risks. 22. since economic growth was steadier in 2007, more immediate preoccupation of asia ’ s central bankers since july 2007 has been to deal with growing inflationary pressures. inflation rates in asia rose beyond projections and in case of inflation targeting regimes resulted in clear breaches. china and india, the two large economies, have resorted to monetary tightening, but primarily through raising cash reserve requirements by 700 bps and 350 bps since july 2007, respectively. these attempts to curb liquidity in the system and excessive demand pressures have not arrested the structural rise in prices. pakistan has been in a monetary tightening mode since april 2005 and has cumulatively raised the policy rate by 350 bps with the last two rounds of increase of 100 bps taking place after july 2007. meanwhile, other countries have held the policy rates steady. in only few cases, such as thailand and the philippines, growth risks outweighed inflation risk. consequently, policy rates were moderately lowered to ease monetary policy but with inflation creeping high, scope for loose monetary policy may no longer exist. 23. the complexity for central bankers in asia is that food inflation, with 40 - 50 % weightage in price indices, is a major driver of inflationary pressures. an excessive monetary tightening in this situation would end up creating complications for the economy without the desired impact on food inflation that is principally propelled by supply side constraints. at the same time, if monetary policy ignores stubbornly high food inflation, second round impacts would eventually strengthen the inflationary expectations. to resolve this dilemma, governments are resorting to fiscal subsidies to avoid full pass - through. high fiscal deficit countries cannot afford these subsidies and as such have resorted to a gradual and phased pass - through of rise in prices to consumers. 24. exchange rate appreciation emerging in a number of asian economies may offset some of the inflationary pressures. however this option is not available to some countries either because currencies are pegged or external current account deficits are high. given these limitations, it is best for countries to focus on fiscal consolidation to allow fiscal space for subsidies. however, this should be perceived as a short term policy response, while encouraging appropriate investments in the agriculture sector to raise productivity and improve functioning of the wholesale and retail markets under vigilance of local