By Ian Chua and Kevin Lim
SYDNEY/SINGAPORE (Reuters) - Inflation fears heightened in Asia on Wednesday as price pressures in Australia intensified and as China's short-term interest rates shot higher on concerns the central bank may soon tighten liquidity.
The pick-up in price pressures could limit the ability of policymakers to inject more stimulus if needed as a weak global recovery dampens demand for the region's exports, weighing on economic growth.
Australia's quarterly headline inflation sped up to a much higher than expected 1.2 percent in the third quarter from 0.4 percent in the second, data showed, reflecting in part a spike in fuel prices.
The outsized move jolted markets, sending the Australian dollar to a 4-1/2-month high and prompting traders to trim chances of another interest rate cut this year.
Australia's data came a week after neighboring New Zealand, India and China all reported inflation was running hotter than expected.
Super-loose monetary policies in the West have sparked a wash of speculative "hot money" flows into Asia, aggravating price pressures and threatening to create potentially destabilizing asset bubbles in some countries.
Strong domestic demand has also spurred prices of everything from food to fuel. India, Indonesia and Malaysia have all cut state fuel subsidies in recent months in a bid to reduce their debt burdens, sending living costs still higher.
Selena Ling, head of treasury research at Oversea-Chinese Banking Corp, Singapore's number two lender, said there was an "upward creep" in inflation across the region.
In Singapore, September consumer prices rose a less-than-expected 1.6 percent, but the central bank warned that core inflation would move higher over the next few quarters.
China's short-term money market rates jumped on Wednesday on worries Beijing may tighten policy to curb rising price pressures. Concerns about the impact of such tightening on the world's second-largest economy rippled through global share markets.
A policy adviser to the People's Bank of China told Reuters on Tuesday the authority may tighten cash conditions in the financial system to address the inflation risks.
Consumer price inflation in China is at a 7-month high while house prices rose the most in nearly three years in September.
FED TAPER WORRIES LINGER
Daniel Wilson, an economist at ANZ in Singapore, sees inflation picking up further in 2014, but added that not every economy will move in tandem.
"For countries facing domestic-induced inflation, Singapore is an obvious case. There are also cost pressures in India because of supply constraints and the pass-through from higher fuel prices in Indonesia hasn't been fully felt."
Malaysia, however, could see domestic demand weaken with the government likely to tighten its budget now that elections are over, he said.
One potential threat for Asia's inflation outlook, particularly for the region's emerging economies, could come early next year when expectations for the Federal Reserve to scale back its stimulus spending return to the fore.
That could see a repeat of this year's sell-off in emerging markets that drove currencies such as the Indonesian rupiah and Indian rupee to multi-year or even record lows, swelling the cost of their imported goods and fuel.
While the quarterly jump in Australia's inflation caught the market's attention, the annual inflation rate for both underlying and headline measures were still comfortably within the Reserve Bank of Australia's (RBA) 2-3 percent target band.
"The RBA pausing for many months to come makes the most sense at this juncture," said Annette Beacher, head of Asia-Pacific Research at TDSecurities in Singapore.
Later in the week, Japan will release its inflation numbers. It is probably the only country in Asia happy to see some price pressure, with the government and central bank having unleashed a potent mix of fiscal and monetary stimulus in a bid to end 15 years of deflation.
Japan's core consumer prices, which exclude prices of fresh food but include oil products, probably rose 0.7 percent in September from a year earlier.
That would mark the fourth straight month of positive readings, keeping the annual growth rate near a five-year high of 0.8 percent seen in August.
(Editing by Jacqueline Wong)