Rising crude-oil price is fuelling inflation woes

Now it seems the sky will be the limit. The rise of crude-oil and commodity prices inevitably boosted inflation to 6.2 per cent last month, the highest level in two years.

Even though core inflation, at 2.1 per cent, remains within the comfort zone of zero to 3.5 per cent set by the Monetary Policy Committee (MPC), the MPC expects core inflation will most likely exceed that after keeping the interest rate unchanged last week at 3.25 per cent.

The MPC pointed out the real interest rate was minus 4.54 per cent, the lowest level in three years.

On the growth side of the equation, the latest data show the economy expanded 6 per cent in the first quarter, slightly exceeding expectations of 5.9 per cent.

The state economic-planning agency forecasts full-year growth at 4.5-5.5 per cent, even though political uncertainty is just around the corner. Such figures allow us to not only erase our concerns that rising inflation may drag down our economy, which may actually be in good shape, but also be lean to counter mounting inflationary pressure.

The government-bond yield has flattened since last month. The two-year bond yield, which is most sensitive to interest-rate expectations, has leaped from 3.5 per cent to 3.91 per cent, while the 10-year bond yield has climbed to 5.08 per cent, from 4.92 per cent last month.

From the market's reaction, particularly the bond market, it seems a big crossroads lies ahead of us, whether the interest rate is at the trough.

We may see the MPC start hiking the interest rate this year. Stay tuned and keep your eyes on crude-oil and commodity prices and the coming data to provide a clue to the interest rate's direction.