Emerging Asia’s central banks seem unlikely to chase the Fed in raising rates, economists say

The Federal Reserve’s counterparts in Asian emerging markets are “in no rush” to chase the U.S. central bank despite its “sharp turn towards a hawkish stance,” Bank of America economists said.

“With little concerns of falling behind the curve, most monetary authorities in EM Asia will likely stick to their own pace and pay more attention to domestic demand recovery,” the economists wrote in a note published last week.

Global markets have seen a wave of volatility as investors reposition in anticipation of multiple rate hikes from the Federal Reserve this year. That scenario has in the past hurt Asia’s emerging economies as it drives the dollar and U.S. Treasury yields higher, potentially spurring capital flight from the region.

But the Bank of America economists said there are three reasons central banks in emerging Asia can “cool their feet for longer”:

1. Modest consumer inflation: “Annual CPI inflation is expected to stay broadly in line with the policy targets, which warrant regional central banks to adjust monetary policies at their own pace, in our view.”
2. Subdued domestic demand growth: “Our current forecasts suggest that the average EM Asia GDP growth during 2020-22 will remain below the pre-COVID trend. By comparison, the US and EM ex Asia did much better in closing their output gaps.”
3. Foreign exchange reserves and current account balance shielding pressure from capital outflow: “FX reserves continued to grow in EM Asia despite the sharp capital outflow in 2020 … In addition, EM Asia also runs a current account surplus, even as a net commodities importer.”

“We believe EM Asian central banks, except for the [People’s Bank of China], will gradually tighten the monetary policies, albeit at their own pace instead of marching in lockstep with the Fed,” they said.

China’s economy was one of the first globally to return to growth during the pandemic’s first year, but the subsequent withdrawal of stimulus and policy tightening has since led to a sharp slowdown in domestic demand.

Recent monetary policy announcements have “revealed great patience” by the central banks of Thailand, Malaysia, Indonesia and the Philippines, Mizuho economist Tan Boon Heng said in a note last week.

The Bank of Thailand, Bank Negara Malaysia and Bank Indonesia have all held steady on key interest rates, which Tan attributed in part to a “lack of and lagged growth recovery” in those countries.

Tan said Bangko Sentral ng Pilipinas, the Philippines’ central bank, is expected to “complete the unanimous policy hold” at its meeting this week. That stands in “sharp contrast” to peers in South Korea and Singapore, he said, where central banks have tightened monetary policy to combat inflation.