Central banks still in no rush to raise rates as inflation takes back seat

September 17, 2021

INFLATION fears are rattling global markets as recent producer price spikes in the United States fuel concerns about an earlier-than-expected tightening from the US Federal Reserve.

Central banks in Latin American emerging markets (EMs) have already raised rates, as has Russia. Meanwhile, South Korea became the first major Asian central bank to adjust its policy rate upwards late last Month.

But the Asean-6 economies are unlikely to be in a rush to tighten, watchers have said, while adding that South-east Asian inflation is still largely within expectations - despite recent swings.

Regional policymakers are thus expected to adopt a wait-and-see approach for at least another six months.

That's even though analysts noted that policymakers risk underestimating price surges, while non-inflation concerns such as currency stability should also weigh on central bankers.

"Inflation is generally manageable across South-east Asia. Even if there have been accelerations that are beyond comfort levels, central banks are tending to look through this and prioritise maintaining very accommodative monetary settings," said Moody's Analytics senior economist Katrina Ell.

Said ANZ Asia research head Khoon Goh: "Inflation is not a primary concern for the region's central banks at present. There is certainly no need for them to tighten policy anytime soon."

Dubbing EM Asia the exception to the push for normalisation, BNP Paribas analysts wrote last week that "we do not see any rate changes until 2023 among Asean central banks, as inflation is low and there is some ground to cover from narrowing output gaps".

Granted, regional consumer price movements have broken with historical trends in recent months.

Singapore's core inflation hit a two-year high in mid-2021, while headline inflation in the Philippines breached the 4 per cent upper bound of the Bangko Sentral ng Pilipinas target range as it hit 4.9 per cent in August.

At the same time, headline inflation softened in July in Thailand and Malaysia, where consumer price increases receded to recent troughs.

But watchers suggested that policymakers were probably not caught off guard, and are unlikely to compensate with a rush to raise rates.

Amid the mixed bag of inflation figures, Robert Carnell, Asia-Pacific head of research at ING, said "most central banks in the region are not going to respond to the inflation backdrop, whether it is too low (Thailand), or too high (the Philippines)".

That's as central banks are expected to focus on growth for now, as the spread of the highly infectious Delta variant devastates economies: "Inflation is a secondary concern," said Ms Ell.

Nomura chief economist Rob Subbaraman said that Asean central banks are still leaning towards the view that any spike in inflation at this point is temporary, given how "not many have overreacted".

Similarly, UOB head of research Suan Teck Kin called inflationary pressures in both Singapore and Thailand "transitory".

The sense of caution is borne out by recent actions by central banks.

Bank Negara Malaysia kept its policy rate at 1.75 per cent last week, in line with predictions; Barclays economist Brian Tan said in a note that the central bank will likely start raising rates only from the second quarter of 2022 onwards.

Meanwhile, the Bank of Thailand held its one-day repurchase rate at 0.5 per cent for the 10th straight meeting in early August. A minority of committee members even pushed for a further reduction in the rate.

The Monetary Authority of Singapore (MAS) - the prime candidate for first Asean central bank to tighten policy settings - is generally expected to stand pat at its October meeting, and normalise only from next April.

Yet some analysts are still worried about the inflation climate.

JP Morgan's EM Asia economic and policy research team warned that the MAS is headed for an earlier-than-expected tightening in October, "given the balance of inflation risks".

Citing "the emergence of domestic price pressures amid elevated and likely rising external prices", analysts Ong Sin Beng and Arthur Luk wrote in a Sept 10 note that "we continue to expect a persistent rise in core inflation over the next six to nine months".

Irene Goh, head of multi-asset solutions for the Asia-Pacific at Aberdeen Standard Investments, wrote last week that "the greater risk to markets is that inflationary pressures are not transitory, as most observers think".

"Persistent inflation would weigh on company earnings by raising costs and hurting wages, causing central banks to raise interest rates and negatively impacting equity markets.

"There's also a risk that central banks react to inflation too late and hike rates too quickly, which would cause equity multiples and valuations to correct," she said in a note.

Besides pressures such as supply bottlenecks and food and commodity prices, Asean economies also face inflation risks from currency weakness against the US dollar, especially if the Fed makes a move, Mr Carnell noted.

In fact, central banks may have to make decisions on factors beyond direct consumer price changes.

Ms Ell, from Moody's, highlighted that rate hikes in Indonesia "will be guided by United States monetary policy normalisation". She expects Bank Indonesia to take its cue from the Fed, in a bid to preserve stability in the rupiah.

Meanwhile, Nomura flagged potentially serious risks to investor attractiveness from very low rates in Indonesia and the Philippines, with Mr Subbaraman writing in late August that "many EM central banks may have overreached by easing monetary policy too far... which has left foreign investors poorly compensated for the weakened economic fundamentals".

He added: "The risk for Asean is not that Asean central banks are behind the curve and have to catch up. I think the bigger risk for Asean is if the Fed is behind the curve and has to catch up.

"And so we would see a sudden pick-up in interest rate hikes in the US and a sell-off in the bond market that leads to capital flight to Asean."

Such a scenario could prove disruptive to regional economies, he believes.

Still, Aberdeen's Ms Goh said: "Our view is that central banks would be more comfortable running economies hot, than to hike too early.

"The risk of hiking too early has more serious consequences than being slightly late. Hiking too fast and too aggressive will kill the cycle that is only currently in its mid-stages."

Chua Han Teng, economist at DBS, added: "The still-uncertain pandemic situation, its economic impact, and the uneven economic recovery remain key considerations in Asean's monetary policy decisions."