Investors are betting two of Asia’s major central banks — the Bank of Japan and the Reserve Bank of Australia — will still need to ease monetary policy over the coming year, if not sooner.
That is in growing contrast to emerging economies, where waning deflationary pressures are trimming the odds of policymakers cutting interest rates this year.
Should the US economy’s recovery remain on track, a rate rise from the Federal Reserve by the end of this year and an expected strengthening in the dollar could afford Asian central banks some monetary policy breathing space.
Simply on the basis of interest rate levels, Indonesia has the most room to ease, with a benchmark borrowing rate of 6.5 per cent even after cutting in June.
Malaysia’s key lending rate is 3 per cent, even after the central bank surprised markets in July with a 25 basis point cut. South Korea and Taiwan most recently cut rates in June.
Analysts think that, with some signs of recovery in domestic economic data, as well as renewed expectations for a US rate rise and an expected strengthening in the dollar, policymakers in Asia may feel less pressure in having to ease policy again so soon.
For example, the Bank of Korea is expected to keep interest rates on hold this week as it takes its time to assess the impact of their most recent cut, as well as for recently announced fiscal stimulus measures to work their way through the economy.
There are still risks to Korea’s outlook in the second half of this year, says DBS.
It points to the government’s push for corporate restructuring in certain industries, as well as the persistent, external uncertainties.
“But the BoK has taken into account these risks when cutting rates pre-emptively in June,” DBS says.
“Unless the upcoming data deteriorate more than expected and/or new risks emerge, the BoK may not rush to further ease policy.”
A recovery in energy costs is eroding the threat of deflation. Oil prices, which slumped to a 12-year low in January below $28 a barrel, represent a significant portion of the CPI baskets for many Asian nations, particularly as a production — and transportation — cost for items such as clothing and food. Prices have now recovered to around $45.
Analysts at ANZ Banking Group forecast oil to end the year at $54 a barrel, a development they say “will see the end of deflation in Asia”.
The bank adds that inflation rates of most Asian economies have gone up over the past six months, and add that their analysis “suggests that CPI inflation rates of most Asian economies would be invariant even if crude prices drop back to $30 or surge to $70, allowing their central banks to stay focused on addressing growth and other domestic issues”.
The most recent readings on manufacturing activity have also been encouraging. China’s manufacturing sector ticked back into expansionary territory in July for the first time in 17 months.
HSBC noted readings across Asia “looked a little better, with improving new export orders in Taiwan and Korea supporting those headline indices, although we saw a weak month of data in Indonesia”.
GDP growth has also been holding up. The Indonesian and Korean economies both grew at a pace of more than 3 per cent year-on-year in the June quarter, while Malaysia grew at more than 4 per cent in the March quarter, the most recent data available.
There was even a silver lining for Taiwan, which grew 0.69 per cent year-on-year in the June quarter, ending nine months of contraction.
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