Asia week ahead: Packing an easing punch

Of five Asian central banks reviewing their monetary policy next week, two have signalled a pause in their easing cycles. The central banks of Australia (RBA) and India (RBI) fall into this category. The RBA has already cut rates in June and July.

…we will be closely monitoring how things evolve over the coming months. Given the circumstances, the Board is prepared to adjust interest rates again if needed to get us closer to full employment and achieve the inflation target. RBA Governor Philip Lowe

We think data this week showing improved inflation in 2Q19 has taken the pressure off the RBA for a third cut. At 1.6%, inflation is still far from the RBA’s 2.5% policy goal, though the bank is also waiting to give recent fiscal policy a chance to achieve the target.

Well ahead of the curve, India’s RBI has eased in all three meetings so far this year, cutting by a total of 75 basis points. But according to Governor Shaktikanta Das, the bank has done even more than that. He considers the very shift to an easing stance at the June meeting, from a neutral position, to be worth an additional 25bp of stimulus on top of pumping the system with ‘surplus liquidity’. We read this as a hint that the RBI has done enough.

Effectively, the rate cut has been 100 basis points if you take into account the change in stance. … Parallel to that we have also ensured surplus liquidity in the system,” RBI Governor Das

With the economy facing upward inflation pressure, albeit gradually for now, and growth remaining supported around 6%, still among the fastest in the world, we don’t think the RBI will want to risk any policy errors by providing excessive stimulus. We don’t mind being outside the consensus again this time, but we expect the RBI to remain on hold next week, while the consensus is looking for another 25bp cut.

Among those likely to cut rates next week are central banks of New Zealand (RBNZ) and of the Philippines (BSP) – a second rate cut by both this year. We aren’t alone; the consensus is also suggesting 25bp rate cuts by both banks. After cutting rates by 25bp in early May, the RBNZ paused at the late June meeting. The market-implied probability for another rate cut next week stands at 92%.

In the Philippines, the BSP policy announcement comes on the day the country’s Statistics Authority unveils GDP figures for 2Q. We expect growth to have stayed below the 6-7% official target for 2019 in the last quarter (ING forecast 5.8% vs. 5.6% in 1Q). Having hiked by 175bp in 2018, the BSP has plenty of policy space to ease, as long as it's supported by falling inflation and stable exchange rates. And we have the best of both worlds - inflation has been falling steadily after peaking at 6.7% in Sep-Oct 2018, and the PHP has been among Asia's top performers this year. The July CPI data just days ahead of the BSP meeting will be timely information for policymakers.

The key question of the week is whether the Bank of Thailand sheds its hawkish bias and becomes part of the global easing wave. Our answer is ‘Yes’. However, that’s not quite evident from a still solid consensus for stable BoT policy.

With growth poised to slow further, 2019 is shaping up to be the worst year for the economy in the last five years. Inflation has been under control (latest 0.9% in the year through July) and the authorities are worried about runaway currency appreciation hurting the economy even more. The central bank’s latest measures to curb short-term inflows haven’t been effective. An aggressive policy rate cut could be helpful here, though judging from the consensus we might not get it. Here again, we don’t mind being the odd one out in our forecast of two 25bp BoT rate cuts this year.

Of all the China data due next week, trade figures will be under the most scrutiny as we try to gauge the impact of trade wars. And just as in recent months, we aren’t expecting anything too bad just yet.

Despite the trade war, China’s exports remain an outperformer in Asia with virtually flat growth in the first half of the year compared to heavy declines in other parts of the region. Economies which are heavily reliant on electronics exports (Korea and Singapore) have been hit hard in the current export downturn. But a second surprising comeback of Taiwan’s exports (also largely electronics driven) could be a hopeful sign of a bottoming in the global electronics slump. Consistent with the consensus, we anticipate a second consecutive month of positive export growth for Taiwan.