Asia’s Central Banks Must Catch Up In The Rate-Hike Frenzy

Asia’s central banks have been bucking a global trend to tighten monetary policy for the past year, but now they find themselves playing catch-up in order to combat increasing inflation and protect their currencies from falling value.

As authorities in emerging economies scramble to convince investors that they are taking action against increasing prices, market analysts fear that Indonesia, the last remaining dove in emerging Asia, maybe the next to move by lifting interest rates up on Thursday.

Last week, Singapore and the Philippines shocked the markets by making unannounced plans to tighten monetary policy. These announcements highlighted the mounting urgency among policymakers to act.

After the Federal Reserve of the United States initiated an expedited timeframe for its policy tightening, the rest of the world, including developing countries, began raising their interest rates as early as June of last year. However, Asia has lagged behind.

As a result of relatively low inflation, central banks in Asia were able to maintain a dovish stance in an effort to support the post-pandemic economic recovery. However, this led to weakening currencies and capital outflows, which occurred at the same time that the conflict in Ukraine exacerbated price pressures globally.

“Have central banks been too slow to act? Yes, I know, it’s a common question, ” Ravi Menon who is the managing director of the Monetary Authority of Singapore, said the following.

“And I don’t want to sound defensive on behalf of my colleagues elsewhere but very few people saw this coming. The markets didn’t see it.

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“The climb in inflation has been quite rapid. It was unusually fast … And many thought the bigger risks were on the downside on growth and so did not see this coming.”

The greatest impact has been felt by bond and currency markets. The Philippine peso is one of the currencies that has been struck the hardest, falling more than 10 percent so far this year and coming within a few cents of its all-time low of 56.53 to the dollar. Since the beginning of the year, the yields on the government bonds of the country have increased by around 200 basis points (bps).

The value of the Thai baht has decreased by more than 10 percent so far in 2018, and the country’s stock market suffered a loss of $816 million in June, breaking a streak of five months in which it had received foreign investment into its equity markets.

A significant portion of the selling was a reaction to the rising Treasury yields and the U.S. dollar, both of which are factors that are outside the control of domestic policymakers. This provided Asia with a reason to postpone rate hikes.

However, central banks are discovering all of a sudden that they can no longer ignore the growing prices of food and oil. This month, inflation rates in Thailand and Indonesia reached their highest levels in more than a year.

Even South Korea, which didn’t start hiking interest rates until August 2021 and didn’t hit a 24-year high in prices until June, saw prices hit a 24-year high in June, which triggered a record-setting half-point rate hike last week.

According to Euben Paracuelles, the chief ASEAN economist at Nomura, “What I suspect they’re doing at this stage is really (to) still focus on fighting inflation for the next few months, because that’s where the concern is.”

He went on to say that growing global headwinds and the possibility of a recession in major economies made the issue of implementing policy even more difficult at a time when inflation in Southeast Asia was just beginning to sharply pick up speed.

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