It’s time to actually believe what the central bankers say about money drying up

Rising inflation, combined with a sense that the dominant Chinese economy continues to grow, mean monetary policy settings in Asia are about to get tighter

PUBLISHED : Tuesday, 14 November, 2017, 10:09am
UPDATED : Tuesday, 14 November, 2017, 10:29pm

There’s a change of tone among central bank policymakers in Asia. Investors should prepare themselves for the possibility of tighter monetary conditions being adopted in various parts of the region. A monetary tide in Asia that has seen ever-lower benchmark interest rates is on the turn.

In China, even as Beijing continues to keep liquidity conditions fairly tight in an effort to rein in the pace of credit creation, economic growth has remained strong while last Thursday’s 6.9 per cent year-on-year rise in China’s producer price index for October, was substantially above the 6.6 per cent increase that had been expected by economists.

Such a situation might not necessarily prompt China’s central bank to opt for higher policy rates but it arguably vindicates a continued application of tighter liquidity conditions and consequently elevated market rates.

And that really matters to the rest of Asia given the importance of the Chinese economy. It provides cover for other countries who might be thinking about edging towards tighter monetary policy but who also fear a post-tightening appreciation of their currencies that could erode export competitiveness.

Additionally, if China’s economy is growing at a healthy pace then other countries in Asia will pivot their own monetary policies off that and choose to ignore, to a great degree, the continued adherence of another major Asian economy, Japan, to ultra-accommodative monetary policy settings.

South Korea may be a case in point.

“Economic growth has picked up to the potential growth rate while inflation is expected to rise toward our target level, gradually allowing us to adjust monetary policy which has stayed accommodative to tackle low growth and low inflation,” the Bank of Korea said last week.

There’s every possibility that the South Korean central bank will now hike interest rates on November 30. If so, that would be the first time the Bank of Korea has hiked rates in more than six years and would mark the end of a spate of eight cuts since 2012 that has taken their benchmark interest rate to its current record low of 1.25 per cent.

Malaysia may also be on the cusp of raising rates.

“Given the strength of the global and domestic macroeconomic conditions, the Monetary Policy Committee may consider reviewing the current degree of monetary accommodation,” Bank Negara Malaysia said last week, even as it kept its benchmark Overnight Policy Rate (OPR) at 3 per cent where it has been since July 2016.

“With this rhetoric, a 25 [basis points] hike of the OPR may come as early as the next meeting on 25 January 2018,” wrote Leong Sook Mei, Asean head of global markets research at MUFG Singapore on Friday.

Thailand’s central bank also seems to be changing its tone somewhat.

While the Bank of Thailand kept its one-day repurchase rate unchanged at 1.5 per cent on November 8, a rate that has prevailed since April 2015 and just 25 basis points above its lowest ever level, the accompanying comments from the Thai central bank could be perceived as suggesting there’s no need for policy to be loosened further.

“The Committee assessed that the Thai economy would grow at a faster pace than the previous assessment driven by growth in merchandise exports as well as continued improvement in domestic demand,” the Bank of Thailand said in its statement.

That might sound all very innocuous but it is perhaps worth bearing in mind that at its previous meeting in September, where the Bank of Thailand also stood pat, there had been prior intimations from the country’s finance ministry that the central bank should cut interest rates, suggestions that the setters of Thai monetary policy ignored.

Over in Manila, the Philippine central bank also opted to keep its benchmark interest rate unchanged at 3 per cent when it met last Thursday but it also chose to raise its inflation forecast for 2018 to 3.4 per cent from the previous 3.2 per cent estimate. It noted that due to the possibility of higher oil prices, the risks to inflation were on the upside.

Again that might sound pretty innocuous but if concerns in Manila grow about the prospect of higher imported inflation derived from higher US dollar-denominated oil prices, then tighter monetary policy, potentially boosting the value of the Philippine peso, could allay such worries by making oil less expensive in local currency terms.

The monetary policy tide in Asia is turning. Local considerations, combined with a sense that the dominant Chinese economy continues to grow apace, mean monetary policy settings in Asia are about to get tighter.