Citigroup: Here's How El Niño Could Derail Monetary Policy

Indonesia, India, and the Philippines are three countries the bank says are particularly vulnerable to inflation, given the weight of food in their price indexes

El Nino

Things are heating up.

Source: NOAA

Should we add disruptions of the oceanic atmosphere system to the long list of things that central bankers need to worry about?

In new research, Citigroup argues that El Niño, which is characterized by unusually warm ocean temperatures in the Equatorial Pacific, could have a big impact on the region's monetary policy and economic growth. 

According to Citi analysts Johanna Chua and Siddharth Mathur, countries in and around Asia could see severe impacts from this weather event.

Tying in the monetary policy factor, note that three indicators central banks often look at when determining monetary policy decisions are inflation, employment, and GDP. In a number of Asian economies, agriculture is both a major source of jobs as well as a large weight in the consumer price index (CPI) basket. Indonesia, India, and the Philippines are three countries that Citi highlights as particularly vulnerable to inflation, given the percentage weighting that food has in their respective CPIs. 

The economies of Vietnam and Indonesia are also largely dependent on the agricultural sector, with the industry making up more than 15 percent of GDP in both countries. 

The sector also employs more than 30 percent of the total work force in such countries as the Philippines, India, China, and Thailand.

The Citi analysts point out that although there doesn't seem to be much of an inflationary impact from El Niño just yet, that doesn't mean there won't be. 

All the Niño regions in the Pacific Ocean are now registering sea-surface temperatures (SST) well above the 0.5ºC threshold, with the most commonly cited Niño 3.4 at 1.3ºC above normal as of last week — the highest reading since late 2009 (Fig 1). With the peak rainfall season in the major Asia agri[culture] growing regions beginning now, a prolonged dry spell has important implications on agri[cultural] output, with a lag. The last two severe El Niño episodes (1997-98 and 1982-83) yielded significant crop damage and a surge in food prices, but other El Niño episodes were mild, and last year’s warnings ended up being a false alarm, helping explain why prices of food staples haven’t reacted much as yet.

Meanwhile, the Food & Agriculture Organization, the United Nations body that seeks to ensure global food security, is warning that El Niño may last through the year and will probably hurt world grain production.

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