By, 5 min read* Emerging Asian growth is being harmed by a new wave of COVID infections* Inflation is expected to be modest in the region due to weak domestic demand* Many Asian commercial banks are expected to maintain rates low this year, according to analysts * Asia has buffers against capital flight thanks to its large reserves and poor imports. * The Fed, not inflation, may dominate Asian monetary policy next year. SINGAPORE/TOKYO, June 30 (Reuters) – In contrast to other developed markets, Asia’s once fast-growing economies are battling with sluggish domestic demand, which is keeping inflation under control, increasing the likelihood that many central banks would forego interest rate hikes this year. High and even destabilizing inflation has traditionally gone hand in hand with great growth in Asian emerging nations, according to investors and policymakers. Slow vaccinations and a new wave of coronavirus infections have slowed economic recovery in Thailand, Indonesia, the Philippines, and India, respectively. While inflation has increased in certain Asian countries, reflating growth remains a larger priority for them, even as growing inflation in western countries such as the United States, the United Kingdom, and Canada receives increased attention. Higher commodity prices, to be sure, have an impact on Asia, as well as the rest of the world, by rising the cost of raw materials. South Korea, whose economy and property market are booming, is likewise gearing up for rate hikes this year. Soft demand, on the other hand, will keep inflation well below the 2% target and relieve immediate pressure on most Asian central banks to respond with tighter monetary policy, according to economists. “The resurgence of illnesses is causing some Asian countries to reimpose activity restrictions that are dragging on inflation, and this trend will persist for some time,” said Makoto Saito, an economist at Japan’s NLI Research Institute. “Many Asian nations will not be able to sustainably increase inflation due to weak domestic demand. As a result, their central banks are unlikely to raise interest rates until the next year “he stated As the tourism-dependent economy grapples with a third wave of coronavirus infections, Thailand’s central bank maintained record low interest rates this month and forecast headline inflation of just 1.2 percent this year. The Philippines’ headline inflation rate increased to 4.5 percent in May from a year earlier, despite the country’s central bank left interest rates at record lows this month and predicted that inflation would return to within its target range of 2 percent to 4% by the second half of the year. Annual inflation in Indonesia rose to 1.68 percent in May from 1.42 percent in April, the highest level since December, but stayed below the central bank’s goal range of 2 percent to 4%. Even in India, where retail inflation soared to 6.3 percent in May, sources told Reuters that the central bank is unlikely to tighten policy to cushion the impact to growth from a lethal second wave of the pandemic. In contrast, emerging markets in other regions, such as Latin America, have seen rate hikes or talk of tightening due to inflation and capital flight concerns. While a tightening in the United States remains a danger for Asian central banks, the lessons learned from the region’s financial crisis in 1998 and the 2013 “taper tantrum” have made them more resilient to the prospect of a massive capital outflow precipitated by the Fed. “Outside of China, Asia’s foreign exchange reserves have touched another record high, so Asian central banks have a lot more of a buffer to manage volatility,” said Khoon Goh, head of Asia research at ANZ Bank in Singapore. Analysts suggest that weak domestic demand reduced imports while exports to other parts of the world increased, lowering current account deficits and making nations like Indonesia less vulnerable to capital flight. While the wounds of the pandemic may begin to fade next year, the expectation of low inflation suggests that Fed policy will have a greater impact on Asian monetary policy than inflation. The true test for Asian central banks may come next year, when the Fed may send clearer signals about rate hike expectations and put greater upward pressure on bond yields in the area. “If bond yields in the United States rise, you can expect increasing bond yields in Asia to rise as well, so we’re not unconnected in that regard,” said DBS investment strategist Joanne Goh. HSBC said it was avoiding the long end of the yield curve for high-yielding Asian economies because their central banks would find themselves in a hard place if the Fed hikes rates. “I believe it will get lot more uncomfortable, perhaps not this year but next year, especially when you see the whites in the eyes of genuine tapering,” said Andre de Silva, HSBC’s head of global emerging-markets rates research. Leika Kihara in Tokyo and Tom Westbrook in Singapore contributed reporting; Sam Holmes contributed further reporting; Ana Nicolaci da Costa edited the piece. Continue reading
