As inflation haunts the US and Europe, rate hikes loom. Will Asia follow suit?

Western economies face a perfect storm of surging consumer demand coupled with a lack of workers, choking supply lines and soaring energy prices
That has the region’s central bankers rethinking ultra-easy monetary policies. But in Asia – while New Zealand, Singapore and South Korea have shown signs of tightening – the wider sentiment is to stay put

Singapore

Bhavan Jaipragas

Published: 8:00am, 21 Oct, 2021

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Is monetary policy tightening on the cards in Asia?

That’s the big question in the market this week amid signals that central bankers in the West may scale back their ultra-easy monetary policies sooner than expected to calm anxieties over inflation.

Soaring prices have haunted investors in the West for much of the year, with concerns heightening in recent weeks.

Across Europe and in the United States, policymakers are confronting a perfect storm of surging consumer demand as Covid-19 restrictions are eased, coupled with various supply side issues – such as companies struggling to find workers, supply lines choking and energy prices soaring.

In Britain, the central bank chief Andrew Bailey signalled over the weekend that an interest rate hike might now be imminent to deal with inflation, even though he said just last month that “price pressure will be transient”.

Speaking to an online panel of central bankers on Sunday, the Bank of England governor said the global surge in power costs meant inflation would remain high for a longer period.

“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” Bailey said.

In the US, the Federal Reserve in September held rates steady, but the policymaking Federal Open Market Committee said a tapering of its bond-buying programme might be merited “soon” as economic recovery remained on track.

The Bank of England has signalled an interest rate hike might now be imminent. Photo: AFP

In the Asia-Pacific region, economists interviewed by This Week in Asia said inflation was not as big a worry, with growth remaining weak owing to the retention of Covid-19 restrictions in many economies.

New Zealand in early October hiked rates for the first time, eyeing its red-hot housing market and overall inflation.

Singapore, the regional entrepôt that serves as a bellwether economy, last week tightened its exchange rate band – which it uses to manage monetary policy – citing a need to “ensure price stability over the medium term while recognising the risks to economic recovery”.

South Korea held rates steady after hiking them in August, for the first time in three years, as authorities eyed a debt hangover.

Song Seng Wun, an economist with CIMB Private Banking, said the move by the three economies was down to domestic reasons and were unreflective of overall sentiment among the region’s central bankers.

“Countries here are still largely impacted by the pandemic, by the Delta variant … looking at the metrics, it looks like most of [the Asian central banks] can say ‘we stay put for now’,” said Song.

01:06

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Priyanka Kishore, head of India and Southeast Asia at Oxford Economics, meanwhile said in an investor note on Wednesday that in most Asia-Pacific economies “cyclical drivers are less evident, with weak growth prospects slowing the pass-through from input to output prices”.

Globally too, she held the view that economies were “not about to enter a high inflation regime”, adding that she expected inflation to dip as supply chain issues were gradually resolved.

“We have been of the view that the world is not about to enter a high inflation regime and still expect inflation to drop back as supply-chain issues are gradually resolved,” Kishore said.

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She added: “While we do forecast high inflation will squeeze real incomes and impede global recovery in 2021 and 2022, this is not true to the same degree for every region. We maintain that [the Asia Pacific region’s] inflation troubles are not as pronounced as in the US, Europe, and Latin America.”

With economies still recovering, growth remained an overarching goal for central bankers, other analysts said.

Central banks’ ability to deal with inflation through rate hikes during the current period of tepid growth is contentious, especially when some of the price pressure is due to the supply chain constraints.

“For example, if plantation workers cannot get to the plantation to harvest the palm oil, palm oil prices stay high, there’s very little that interest rates can do,” Song said.

Nicholas Mapa, a senior analyst with ING, said there would probably be a split of policy direction in Southeast Asia.

Harvested palm oil fruit are loaded onto a truck in the Penajam area of East Kalimantan, Borneo, Indonesia. Indonesia is the world’s biggest palm oil exporter. Photo: Bloomberg

Indonesia, the world’s biggest palm oil and thermal coal exporter, was benefiting from rising commodity costs, while the Philippines was facing above-target inflation and calls to hike rates. Singapore, which surprised analysts with last week’s tightening, did so “only after establishing that their economic recovery was intact, after a robust third quarter GDP reading and after reverting to 2019 levels of GDP earlier this year,” Mapa said.

“We can expect central banks of countries that are still recovering to hold off on rate hikes for as long as possible, to give their respective economies as much support before reversing,” Mapa said. “Meanwhile, central banks whose countries are doing better in terms of recovery may opt to begin their tightening cycle sooner rather than later.”

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Joseph Incalcaterra, the chief economist for the Asean region at HSBC Bank, said Malaysia might be the next country to tighten monetary policy in the region “albeit not imminently”.

The country is reopening after months of infections and lockdowns and its vaccination rate has surged in recent months. Malaysia’s favourable export mix of semiconductors, natural gas and palm oil suggested “a rapid recovery is upon us, and by the middle of next year we expect domestic demand to have recovered quite meaningfully, setting the stage for a gradual tightening stance,” Incalcaterra said.

“Elevated household debt growth will be a supporting factor in kicking off policy rate hikes in the middle of next year.”

This article appeared in the South China Morning Post print edition as: with rate rises looming in west, will Asia follow suit?