Articles
5 May 2022 

Asia: accommodation to decline as inflation rises

Asian central bank policy remains accommodative, but inflation is beginning to rise, and that accommodation is on borrowed time

Editorial_509535013.jpg
Reserve Bank of Australia now looking likely to raise rates not only sooner, but also faster than previously expected
Source: Shutterstock

Asia: less affected by reopening and Ukraine war than Europe or the US

It is always difficult to generalise about non-China Asia. But in recent months, the basic message has been that the region has not suffered as much as Europe or the US from inflation driven by economic reopening and is also less exposed to the inflation consequences of the Russia-Ukraine war.

While that generalisation is still supportable, the last month has seen it taking a hit, with Asian inflation pushing higher, and pressure growing on central banks in the region to lean against this with higher rates.

Asian inflation vs a year ago

 - Source: CEIC, ING
Source: CEIC, ING

Australia - rates to rise sooner and probably faster

Nowhere is this more apparent than in Australia, where a 5.1% 1Q22 inflation reading has dramatically changed the outlook for rates. We have just seen the Reserve Bank of Australia (RBA) hiking rates by a larger than expected 25bp taking the cash rate target to 0.4%. One feature of the Australian example which generalises to the rest of the region is that the RBA had until fairly recently suggested that policy was likely to remain extremely accommodative for a protracted period.

India trying to have its cake and eat it?

The same basic accommodative and patient stance was true for many central banks in the region. Another good example is the Reserve Bank of India (RBI), which left rates unchanged at its scheduled April meeting, even though headline inflation had risen to within a whisker of 7%. The April RBI statement stated that the central bank wanted policy “to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. That’s quite a mouthful, and equally hard to interpret. In the end, it looks like the RBI decided that trying to have it both ways was not a credible position, and they hiked rates by 40bp at an unscheduled meeting on 4 May.

Rest of Asia and some exceptions to the trend

Bangko sentral ng Pilipinas (BSP) governor, Benjamin Diokno, has suggested that the Philippines will join this tightening group next month too, though the exact timing will be determined by inflation, with the April inflation figures likely to show a strong pick up from the March rate of 4.0%.

Korea and Singapore started their policy normalisation earlier than other Asian economies and remain on this path. New Bank of Korea governor Rhee Chang-yong recently said that he was more worried about inflation than about growth and that the BoK should stay on the path toward policy normalisation. The Monetary Authority of Singapore (MAS) is more tight-lipped about its intentions, but the continued rise in 3m SIBOR (up more than 60bp since February) indicates the efforts having to be made to keep the Singapore dollar on the announced path of modest nominal appreciation – harder of course in an environment of generalised US dollar strength.

There are, of course, some deviations from this general trend away from policy normalisation. The Bank of Japan, for example, has a rather different inflation backdrop to most other economies in the region. And rather than dilute its accommodation, the BoJ has just launched unlimited daily fixed-rate buying of longer-dated government bonds to support their ongoing yield curve control policy. Likewise, Bank Indonesia Governor, Perry Warjiyo, has commented that rate increases are the last option and that required reserve rate (RRR) increases were likely to do the brunt of the adjustment while liquidity remained ample. But these two are the exceptions that prove the general rule.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).