Benchmark rates in most Asian economies have remained unchanged over a year amid sticky inflation. Asian central banks have depended on the effectiveness of monetary policy to support growth by lowering the cost of borrowing. Most have hinted to avoid future rate hikes, in order to support economic recoveries.
As per economists, policies will have to center on more government borrowing as there’s little room for new stimulus reliefs. The new wave of coronavirus cases all over Asian economies has further undermined virus-related reliefs from last year. “We expect Asia-Pacific central banks to remain on hold through 2021 for the most part,” Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings said in a January 2021 report.
The pandemic has continued to ravage economies in Asia in 2021, with surging coronavirus infections, continued travel restrictions, and a slow pace of vaccinations. The emergence of new variants in various countries continues threatening recovery prospects in many Asian countries.
Policy stance by central banks in Asia
Bank of Korea (BOK) kept its main policy rate unchanged for the rest of 2021 in its latest review on May 25. In May 2021, the government think-tank Korean Development Institute said, “The need for adjusting the monetary policy stance is not high for now.” BOK sees South Korea’s economy expanding at 3% to 4% this year. Amid dampened consumer spending backed by lockdowns, South Korea’s economy is being cushioned by soaring exports, that expanded at the sharpest pace in more than a decade in April. Although the pace of recovery is uneven across sectors. This is after a contraction of 1.0% in 2020. As per the IMF, South Korea’s comprehensive economic response featured fiscal support and measures helped it navigate the Covid-19 shock well.
The Monetary Authority of Singapore’s (MAS) monetary policy stance remained accommodative at its last meeting in April 2021. The central bank plans to maintain its neutral policy stance throughout 2021. This is despite April 2021 inflation spiking to 2.1%, the highest since mid-2014. The bank said that the pace of increase in inflation should ease in the second half of this year. On the other hand, the second wave of the Covid-19 pandemic has led to tighter pandemic-driven restrictions on movement, hitting growth prospects. But, Singapore has maintained its growth forecast for 2021.
India has been facing newly implemented lockdowns due to the second wave of virus, which has dampened economic activity. To address the Covid 2.0 challenges, its central bank, the Reserve Bank of India (RBI), continues to play a proactive role. On May 5, the RBI unveiled measures like supporting healthcare infrastructure, greater repayment flexibility, extending loan tenures, ensuring credit flow as well as one-time restructuring of loans to individuals, small businesses, and MSME borrowers. Economists now expect the RBI to expand a quantitative easing program in Q2 as well in order to keep borrowing costs under check.
Bank Indonesia’s (BI) decision to keep the benchmark rate at 3.5% record lows was announced on May 25. As per the policy review, Indonesia’s inflation remains low in line with weak demand and adequate supply. The central bank plans on providing adequate market liquidity through quantitative easing to the banking industry. The authorities in Indonesia have maintained supportive fiscal and monetary policies. These include approval of additional targeted support through a supplementary budget and ample credit supply, especially to small and medium enterprises (SMEs). BI plans on stimulating bank lending to the corporate and priority sectors, to catalyze economic growth. The move was a move aimed to accelerate the domestic economy’s recovery as Southeast Asia’s largest economy struggled to regain momentum lost in the 2020 year. The central bank has “more than ample space” to cut rates further in 2021, as per Nicholas Mapa, senior economist at ING Research.
Given the continued rise in virus cases and extended lockdowns in the Philippines, the central bank-Bangko Sentral ng Pilipinas (BSP) left its key interest rate steady at a record low on May 12. It said it will continue supporting the economy and projected inflation to remain elevated this year. The bank said the economy contracted more than expected in Q1 due to lengthy and restrictive coronavirus curbs.
Hit with the third wave of infections, the Bank of Thailand (BOT) has left its policy rate unchanged at 0.5% since mid-2020 and plans to review the next policy and economic outlook on June 23, 2021. Analysts expect the benchmark interest rate in Thailand to stay at a record low until the economy clearly recovers. However, inflation in the second quarter may exceed the BOT’s target range. On May 13, the central bank said is likely to provide further monetary and credit support as the country deals with the third wave of rising in coronavirus cases. BOT had recently announced a financial package in March, in conjunction with the government.
Vietnam has taken decisive steps to limit both the impact on health and the economic fallout of the pandemic. The State Bank of Vietnam (SBV) said it is using monetary policy tools to ensure liquidity for the banking system, easing the pressure on deposit and lending interest rates. It plans to keep a proactive and flexible monetary policy and help reduce input costs for credit organizations. SBV also announced that it has ordered credit institutions to facilitate people and enterprises’ access to credit to help minimize loansharking. Vietnam had made impressive economic growth last year, led by export-oriented manufacturing and resurgent domestic demand, as per the IMF.
Bank Negara Malaysia (BNM) also kept the key rate steady at 1.75%, in the wake of rising infections in the country. “The growth trajectory is projected to improve, driven by the stronger recovery in global demand and increased public and private sector expenditure amid continued support from policy measures,” BNM said in a statement on May 6, 2021. Fiscal stimulus from the government and the low-interest-rate environment has continued to support recovery in Malaysia’s economy. However, slow progress in the vaccine administration, the new wave of Covid-19 infections, and fresh lockdown measures remain as downside risks to Malaysia’s growth outlook.
The resurgence of the virus in Japan led to the third state of emergency, casting cast a shadow over its recent economic growth. Thus, the Bank of Japan (BOJ) kept its monetary policy unchanged on April 27, 2021, with the short-term interest target of -0.1%. BOJ maintained its massive stimulus measures and predicted to miss its 2% inflation target for the next two years to come. It added to continue with powerful monetary easing, indicating additional fiscal spending. BOJ further plans to consider extending its scheme to support corporate funding beyond the end of September. It expects economic recovery on the back of growing global demand and rollout of Covid-19 vaccines. The bank, however, warned of risks from an uneven recovery since economic inequality has become more apparent now.
China’s central bank is keeping an overall disciplined approach to the volume of its stimulus. People’s Bank of China (PBOC) voted on May 20, 2021, to keep the rate at the same level for the thirteenth month in a row. The benchmark lending rate, the loan prime rate has been unchanged for a year in China. PBOC says that economic policy should remain supportive of the recovery. In addition to relief for households and businesses, the country has made greater use of public investment to support the economic recovery.