Home Asia economy Are Asia Pacific countries poised for interest rate hikes? 

Are Asia Pacific countries poised for interest rate hikes? 

Asia rate hike
Are Asian nations ready for rate hikes? (Source: Sony Herdiana / Shutterstock.com)

South Korea’s central bank is the latest to announce its decision to raise interest rates in the Asia Pacific region. This is the second time since the Covid-19 pandemic started that the country undertook a rate hike, and it even revised its inflation forecast upward. 

According to the Bank of Korea’s (BOK) monetary policy board decided to increase interest rates by 25 basis points from 0.75% to 1.00%. The central bank is projected to move forward with its policy tightening, with rates forecast to reach 1.50% by the end of 2022. 

BOK Governor Lee Ju-yeol has also mentioned the possibility of another rate hike in the first quarter of 2022, ahead of the nation’s presidential elections in March. 

The central bank of South Korea has been one of the first central banks globally to withdraw monetary stimulus introduced at the onset of the pandemic in 2020. The country’s decision on the stimulus withdrawal is attributed to concerns about financial imbalances as household debt has reached $1.55 tn in the third quarter of this year. Also in line with its recent decisions is the BOK’s higher inflation outlook for 2022, raising it from 1.5% to 2.0%. 

Meanwhile, the Reserve Bank of New Zealand (RBNZ) also raised its cash rate by 25 basis points to 0.75%. This is the central bank’s second consecutive rate hike, and it came after its withdrawal of the pandemic stimulus. New Zealand projects CPI (Consumer Price Index) inflation to surge by more than 5% in the near term before falling to the 2% target over the next two years. 

In a statement announcing the interest hike, the RBNZ pointed out that this near-term rise in inflation was made worse by higher oil prices, increasing transport costs, and the effect of supply shortfalls. 

APAC central banks keeping interest rates steady

The rate hike scenario is however different in other Asian countries, which are deciding to remain accommodative and keep their current interest rates. In contrast with the decision of the RBNZ, the Reserve Bank of Australia (RBA) decided to maintain its position that interest rates are unlikely to be increased until 2024. This was despite bank economists’ forecast that wages would increase faster than the Australian central bank’s expectation and would force it to raise rates sooner. 

In early November, RBA Governor Philip Lowe ruled out the possibility of a rate hike in 2022, arguing that Australia’s economy and inflation should be different from its central scenario before the central bank’s board considers a hike next year. 

Meanwhile, Thailand’s central bank is expected to retain its record low 0.50% interest rate – that was confirmed in September – until at least 2023. According to Assistant Governor Titanun Mallikamas, the increase in vaccinations and faster-than-expected easing of restrictions should support the economy the rest of 2021 and next year.

Malaysia’s central bank, Bank Negara Malaysia (BNM), also decided to keep its overnight policy rate at its current record low of 1.75%. The country has been implementing different levels of lockdown due to the Delta variant’s spread but has since eased its restrictions. 

According to BNM, the country’s growth momentum will improve going into 2022 due to several factors, including higher global demand, increased private sector expenditure as economic activity resumes, and continued policy support from the government. 

However, the central bank points out the remaining risks, including slower than expected global economic growth, worsening disruptions in the supply chain, and the emergence of new Covid-19 variants. 

In the PhilippinesBangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno announced in September the central bank’s decision to keep interest rates at the all-time low of 2.0%. 

This represents the seventh consecutive board meeting that decided on keeping the current rates. The BSP board has also decided to keep overnight deposit and lending rates at 1.5% and 2.5%, respectively. 

Economist Alex Holmes of Capital Asia told CNN Philippines that while the Philippine economy will remain depressed for some time, inflation is forecast to decline soon, so the central bank will be forced to maintain a supportive monetary policy, possibly until the end of 2022. 

The BSP Monetary Board forecasts inflation to average 4.4% this year, up from its previous projection of 4.1%, before settling at 3.3% in 2022 and 3.2% in 2023. The Board argued that the current monetary policy settings are still applicable given the manageable inflation environment and the uncertainty of the country’s economic growth.