Most Asian central banks will stand pat for now, even with the Federal Reserve poised to raise borrowing costs this week.
While previous tightening cycles in the US prompted many Asian nations to move in lockstep, things are different this time. Subdued inflation and healthy foreign reserves reduce the need to move quickly and the risk of a trade war gives policy makers another reason for pause.
China, Japan and Australia anchor the region’s bias to staying on hold, but there are important exceptions. India remains hawkish and economists also expect South Korea and Indonesia to raise rates this year.
Of course, the picture could change quickly if fund outflows from Asia jump, but right now this is how Asia’s major central banks are placed for another Fed rate hike.
The People’s Bank of China is likely to refrain from raising the benchmark lending rate, though it has the option to increase borrowing costs it charges on the open market to head off any run on the yuan.
If needed, China can also tighten through more financial oversight and debt containment.
“I just don’t see any reason for China to hike,” said Zhou Hao, an economist at Commerzbank AG in Singapore. Domestic market rates are already quite high, and there’s no
sign of the economy overheating or any risk for inflation to surge this year, he said.
The Bank of Japan is still a global laggard in stoking inflation, despite an unprecedented stimulus program. The latest inflation reading, due on Friday, is forecast to show Japan’s core price gauge at just 1 percent, giving the BOJ little reason to tighten anytime soon.
The yen has strengthened the most against the dollar among major currencies this year, making it even harder for Japan to boost inflation. Governor Haruhiko Kuroda, who starts a new five-year term as BOJ chief next month, keeps repeating that policy normalization is far away.
India’s inflation-targeting central bank is set to keep its hawkish bias given expectations that price pressures will gather steam in coming months. The Fed raising rates could also narrow the spread between Indian government debt and Treasuries, putting downward pressure on the high-yielding rupee, which has been one of the worst performing currencies this year.
The Reserve Bank of India will have its eye on portfolio flows and needs to be on guard if the Fed raises rates faster than anticipated, according to Hugo Erken, a senior economist at Rabobank International.
After raising rates in November from a record low, Bank of Korea Governor Lee Ju-yeol sees little likelihood of a strong market reaction to a hike by the Fed this month.
But he did indicate to parliament that it would be appropriate for the BOK to adjust policy accommodation if inflation moves back as forecast to the 2 percent target and if the economy continues expand in line with its potential growth rate.
With inflation below the Reserve Bank of Australia’s target, it will be in no hurry to follow the Fed. While Australia’s economy is expected to expand above its speed limit — estimated at 2.75 percent — that won’t be quick enough to force an interest-rate increase. Minutes of this month’s policy meeting noted that markets are pricing in no change this year and a quarter-point increase only in the first half of 2019.
Nevertheless, Deputy Governor Guy Debelle has said global investors are under-pricing the uncertainty over the future path of rates, warning that markets are likely to see higher volatility.
The Philippine central bank, which is expected to keep rates unchanged this week, has been pushing back against pressure to tighten policy. Even so, Bloomberg Economics expects the the overnight borrowing rate to rise by at least 25 basis points in the second half of this year.
After an aggressive run of easing over the past two years, Indonesia’s central bank has shifted its focus to currency risks and has held its rate since a cut in September. Rates could go higher this year but is forecast to stay pat at a review this week.
Malaysia’s central bank, which raised interest rates in January, was among the first in Asia to tighten policy. Since then it’s signaled a more neutral stance. Meanwhile, in Thailand, the central bank has kept its key rate steady since 2015 to support the economy while it battles against a rising currency.
“The question is whether Southeast Asian growth is synchronized enough with the US to absorb higher rates,” said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong.
“So for central banks, there are two considerations: follow the Fed or help the domestic economy. And for many of them, the latter will outweigh the former.”