The global monetary policy tightening cycle has arrived in Asia, with South Korea becoming the first major central bank in Asia to tighten since 2014. While others may be set to follow, the ascent will be gradual.
South Korea, home to the world’s biggest maker of smartphones and memory chips and a powerhouse manufacturer of everything from cars to ships, raised its benchmark rate to 1.5 percent on Thursday. But Governor Lee Ju-yeol made it clear he’s in no hurry to raise rates again, telling reporters that policy will remain accommodative.
“So long as CPI inflation stays benign–-our base case-–it should be a very gradual tightening cycle in Asia,” said Rob Subbaraman, chief economist for Asia at Nomura Holdings Inc. in Singapore. “With high domestic debt, many Asian countries’ domestic demand is more sensitive to rate hikes than before. It is important to note that this is reducing accommodation. Asian monetary policy is far from tight.”
With debt levels surging, policy makers in the region are keen to use a period of faster economic growth to move interest rates from record lows. But those debt levels mean each rate increase could be painful, dictating a softly-softly approach.
And the trend is likely confined to the small and mid-sized Asian economies for now. The world’s second- and third-largest economies, China and Japan, are probably some way off tightening, Tom Orlik of Bloomberg Economics said in an email.
The People’s Bank of China is focused on a campaign to rein in risk in the financial system rather than inflation, while the Bank of Japan remains a long way from its 2 percent inflation target. India, meanwhile, is focused on stoking growth.
Still, a surge in trade fueled by demand for electronics goods has proved more durable than expected, sending Asian exports to record levels and boosting corporate profits and economic growth. If those trends are sustained into 2018, Asia’s central banks are set to start falling in line with a global shift toward higher borrowing costs.
“The Bank of Korea move is a reminder that the recovery in global trade has changed conditions for Asia’s exporters,” Orlik said.
As for who may be next in Asia to raise interest rates, there are two top contenders.
A booming economy has prompted some economists to predict Bank Negara Malaysia may raise interest rates as early as its first meeting of 2018 on Jan. 25, even as inflation remains contained. A recovery in exports and strong growth in consumption fueled the economy’s 6.2 percent expansion last quarter, the fastest pace since 2014. Governor Muhammad Ibrahim has said any adjustment would be a “normalization” rather than a tightening.
Gross domestic product rose 6.9 percent in the third quarter from a year ago, exceeding even the most bullish forecast in a Bloomberg survey of economists. The International Monetary Fund has warned that the Philippines must be ready to tighten.
The other factor Asia’s central bank chiefs must weigh: how many times will the Federal Reserve raise in 2018 after a widely anticipated move in December. While Asia had managed to decouple from the Fed’s moves since late 2015, that may not be the case next year.
“The Bank of Korea kicked off Asia’s tightening cycle today,” said Frederic Neumann, co-head of Asian economics at HSBC Holdings Plc in Hong Kong. “After a long stretch of highly accommodative monetary policy across the region, monetary officials are itching to push rates higher.”