Soaring food prices are wreaking havoc in Asia as governments hike interest rates to keep inflation at bay while facing the risk of slowing economic growth.
The higher interest rates can curb spending and soak up excessive capital but also drive up currencies as the region attracts capital flows from the U.S. and Europe where rates are very low amid lackluster growth.
The rising rates and currencies are threatening to blunt the region's export competitiveness and curtail vital growth, which can throw many out of jobs and scuttle poverty-eradication efforts, experts warn.
The last time the region plunged into a severe financial crisis was in 1997-98, when it grappled with a currency meltdown that drove mostly Southeast Asian economies into a severe recession as well as high unemployment, social unrest and political turmoil.
But unlike the decade-ago crisis, when it emerged mostly unscathed, China is in the forefront of the fight against rising prices.
China this week raised interest rates for the third time since mid-October ahead of a report which is forecast to show inflation accelerated to the fastest pace in 30 months.
The Chinese central bank said in its website that the benchmark one-year lending rate will increase to 6.06 percent from 5.81 percent, effective Wednesday. The one-year deposit rate will rise to 3 percent from 2.75 percent.
The People’s Bank of China took the action on the last day of a week-long Lunar New year holiday in an apparent bid to cushion any negative market effects, and before a report next week that most analysts say may show consumer prices rose 5.3 percent in January from 4.6 percent the previous month.
China's "cumulative rate rises, since the start of the current cycle in October, represent the most dramatic tightening in such a short period in at last 15 years," said Dariusz Kowalczyk, a senior Asia economist at Crédit Agricole Corporate and Investment Bank.
"The hike confirms a shift in policy, with the emphasis moving away from fostering growth and towards curbing price pressures," he said.
China is hoping that higher interest rates will encourage citizens to deposit more of their money in banks and also restrict demand for mortgage loans in a bid to tame the red-hot real estate sector.
High housing costs have frustrated many first-home Chinese buyers who feel apartment prices are out of their reach.
The central bank may also turn to increasing the value of its currency -- at a record high of 6.5850 against the U.S. dollar on Wednesday -- in a move that could make Chinese goods more expensive and cool growth of the vital export sector.
The tighter monetary policy overall is expected to slow China's economic expansion, which exceeded 10 percent in 2010.
Like China, other Asian nations such as India, Indonesia, Vietnam, Laos, Singapore, South Korea and Thailand are also grappling with inflationary pressures mostly as a result of rising food prices, blamed partly for the unprecedented protests that have rocked Tunisia and Egypt.
The United Nations' food agency, the Food and Agriculture organization (FAO) said last month that global food prices hit a record high in December.
Wheat and corn are at their highest levels in more than two years as major importers Algeria ramped up purchases to quell domestic unrest over food price inflation.
Dry conditions in China, a top wheat producer, and freezing cold weather in the U.S. Plains and fires in Russia last year had sent prices higher.
Soybean prices also hit their highest in more than two years this month.
"Sharply rising food prices are an important factor in boosting headline inflation in Asia," said Stephen Roach, a senior lecturer at Yale University and non-executive chairman of Morgan Stanley Asia.
"But this is hardly a trivial development for low-income families in the developing world, where the share of foodstuffs in household budgets -– 46 percent in India and 33 percent in China -– is two to three times the ratio in developed countries," he said in a recent report.
The authorities in the region had not been quick to address the problem, he lamented.
"The good news for Asia is that most of the region’s monetary authorities are, in fact, tightening policy. The bad news is that they have been generally slow to act."
Among economies that held back raising interest rates even as prices surged was Indonesia, which feared the move would draw excessive capital inflows and derail economic recovery from the global crisis.
Last week, however, the central Bank Indonesia raised interest rates for the first time in a year-and-a-half as consumer prices jumped 7.02 percent from a year earlier in January, a slightly faster pace than December's 6.96 percent increase.
India's inflation for the next fiscal year has been forecast by some analysts to rise to nearly seven percent from the earlier six percent. The country's central bank has raised interest rates seven times since March.
The inflation rate in Vietnam also jumped, by another double-digit in January.
The consumer-price index rose 12.17 percent from the same month a year earlier, higher than the 11.75 percent in December, and the fastest pace in two years, Vietnam's General Statistics Office said in Hanoi.
Vietnam plans to cut back on public spending and issue fewer government bonds in an attempt to tame inflation, Minister of Planning and Investment Vo Hong Phuc told the state-controlled Tuoi Tre newspaper.
Unlike most other economies, the higher prices coupled with a snowballing trade deficit has driven down the Vietnamese currency.
The dong currency was devalued three times since November 2009.
Even in tightly-regulated Singapore, inflation rose to 4.6 percent in December, its highest level in two years, from 3.8 percent in November. The reason for the rate pickup was mainly attributed to higher costs of accommodation and cars.
The rising prices are adding pressure on the Monetary Authority of Singapore, which uses the exchange rate instead of interest rates to manage inflation, to keep the the Singapore dollar high. It has already risen 11 per cent in the past one year.
In Laos, rising inflation has prodded the government to hike the minimum wage to help workers cope with higher costs.
The Ministry of Labour and Social Welfare agreed "in principle" to the wage rise after meeting with representatives of trade Unions and business groups, the state-run Vientiane Times reported.
Inflation in Laos hit more than eight percent last year.
Overall, spiralling food prices coupled with high oil prices are giving the shudders to policy makers and financial officials.
"Energy prices are rising swiftly, reflecting rapid growth in the emerging economies. Food prices are rising too —- though here supply shocks are the main reason -— with potentially devastating consequences for low-income countries," warned International Monetary Fund chief Dominique Strauss-Kahn.
"There are risks of overheating, and even a hard landing," he said, referring to the challenges facing the region.