While relatively low inflation allowed Asian central banks to stay dovish in order to support the post-pandemic economic recovery, this resulted in currency depreciation and capital outflows.
After defying global pressure to tighten monetary policy for a year, Asian central banks are now scurrying to catch up in order to combat rising inflation and safeguard failing currencies.
Market analysts believe Indonesia, the last remaining dove in emerging Asia, would be the next to raise interest rates on Thursday, as policymakers strive to persuade investors that they are combating increasing costs.
Singapore and the Philippines startled markets this week with unexpected tightening pronouncements, highlighting officials’ mounting eagerness to act.
Asia has lagged as the rest of the globe, particularly emerging nations began raising rates as early as last June after the US Federal Reserve initiated an expedited path for policy tightening.
While relatively low inflation allowed Asian central banks to stay dovish in order to assist the post-pandemic economic recovery, this resulted in weaker currencies and capital outflows, even as the war in Ukraine intensified global pricing pressures.
Have central banks acted too slowly? Yes, I am aware that this is a frequently asked question “The Monetary Authority of Singapore’s managing director, Ravi Menon, stated this at a press conference on Tuesday.
And, without sounding defensive on behalf of my colleagues overseas, few people saw this coming. The markets missed it.
The growth in inflation has been pretty significant. It was extremely rapid… And many people thought the biggest dangers to growth were on the downside, so they didn’t see this coming.”
Currencies and bonds have taken the brunt of the damage. The Philippine peso is one of the hardest hit, down more than 10% year to date and just off a nearly 17-year low of 56.53 per dollar. Government bond yields have risen by around 200 basis points (bps) since the beginning of the year.
The Thai baht has dropped more than 10% this year, and Thailand lost $816 million in June, breaking a five-month string of foreign investment in shares.
A major portion of the selling has been in response to rising Treasury yields and the US dollar, both of which are variables outside the control of domestic authorities, giving Asia a justification to postpone rate hikes.
However, central banks are discovering that they can no longer ignore rising food and oil prices. In Thailand and Indonesia, inflation has reached multi-year highs this month.
Prices in South Korea, which began rising rates as early as August 2021, reached a 24-year high in June, prompting a record half-point rate hike last week.
“I assume they’re still focusing on battling inflation for the next few months because that’s where the issue is,” said Euben Paracuelles, chief ASEAN economist at Nomura.
Peer Pressure
India, which saw its central bank raised rates by 40 basis points in an off-cycle move in May, has seen six straight months of foreign investor stock outflows, adding to a record slide in the rupee.
The typically volatile Indonesian rupiah is only down about 5% against the dollar this year, despite a 2.2 percent monthly drop in June.
It has been assisted to some extent by resource-rich Indonesia’s improving trading position and the fact that foreigners currently hold less than a fifth of its high-yielding bonds.
Others, like the Philippines and Thailand, are far more vulnerable due to current account deficits and, in the latter’s case, reliance on a tourism sector that is still reeling following the COVID.
Indonesia has been able to postpone rate hikes for the most part. But I believe they will increase… simply because everyone has tightened up already “ING senior economist Nicholas Mapa stated.
Despite this, only 11 of the 29 analysts polled by Reuters predict Bank Indonesia to raise interest rates on Thursday.
The room to maintain growth-friendly monetary policy is absolutely coming to an end very soon,” said UOB economist Enrico Tanuwidjaja, referring to central banks that have yet to raise interest rates.