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Inflation and monetary policy in Asia and the Pacific

Inflation in Asia
Inflation worries in Asia are forcing some central banks to tighten monetary policy.

Rising exports have led to Asia’s post-Covid growth recovery, on the back of globalisation and importation through the trade channel. But coronavirus-driven price increases may already have peaked for some economies. While there is the optimism of economic recovery in the global outlook, concerns of inflation are back for some economies in Asia. This is on the back of rising demand and supply chain constraints, logistical issues and soaring commodity prices, that are then also leading to increases in prices.

Some of the world’s top economies are looking to begin hiking interest rates, which were allowed to fall to historically low levels last year, in order to support major economies from the pandemic-led downturn.

IMF chief economist Gita Gopinath told Nikkei Asia, that inflation expectations are beginning to rise much faster than expected because it was so low last year. But inflation rates are expected to return to normal in the near term. While inflation is elevated, the baseline is for inflation to come down to normal ranges by the middle of next year, for many countries, she added.

While high-interest rates are viewed as being bad for growth, industry experts believe that Asian economies may benefit from a gradual policy normalisation since it reflects stronger economic growth. But much of the economies of Asia seem to be divided over inflation and bringing forward rate hikes.

Is inflation bringing forward rate hikes?

Major central banks worldwide had largely adopted inflation focused policy framework since the pandemic struck, enjoying low to moderate inflation. But with rising global inflationary pressures, shifting back towards growth from inflation seems crucial for some policymakers.

Frontier Markets (FMs) have stepped up their efforts to contain rising inflation, Fitch Ratings said in a recent report. According to the rating firm, while a number of central bankers continue to view the pick-up in inflation as short-lived, many are tightening monetary policy to reduce the risk of transitory increases becoming more permanent.

Following the US Federal Reserve’s push to start reducing its monthly bond purchases, policymakers out of South Korea, Singapore and New Zealand, have joined in with plans to initiate rate reverse and move towards scaling back their asset purchases.

In an earlier-than-expected move, Singapore’s central bank – the Monetary Authority of Singapore – tightened its monetary policy for the first time in three years, the rise in inflation being a major factor for the change. Raising the slope of currency band ‘slightly’ from the previous 0% rate of appreciation per annum, MAS officials said it ‘will ensure price stability over the medium term while recognising the risks to the economic recovery.’

Similarly, backing away from an accommodative monetary stance, another major economy out of the Asia-Pacific region – South Korea – also surprised economists with its monetary tightening. The central bank of South Korea raised interest rates by 25 basis points to 0.75%, earlier in August.

New Zealand’s policymakers also raised the key rate by 25 basis points to 0.50% in early October.

Policy dilemma

Emerging economies of Asia, which are experiencing less inflationary pressure, are continuing to leave their rate policies on hold. The People’s Bank of China maintained a largely neutral monetary policy this year. The central bank officials said inflation risks are “controllable” and added that while consumer inflation is expected to pick up, it will remain within a reasonable range.

The development comes in when factory-gate inflation in China hit its highest level in a quarter of a century. During September month, the producer price index (PPI) rose 10.7% from a year earlier, the National Bureau of Statistics (NBS) data showed. Being the largest exporter in the world, China’s soaring prices are another risk factor for the global inflation outlook.

Meanwhile, Australia’s central bank kept its monetary settings unchanged. The move by central bank officials last week is intended to help cushion the economic impact of lockdowns ahead of a gradual reopening along the east coast of Australia. In India, the Reserve Bank of India (RBI) also kept policy rates unchanged at 4 per cent for the eighth consecutive time.

In Southeast Asia, Indonesia also announced to hold interest rates steady. Meanwhile, its inflation at 1.6% in September, was expected to remain subdued this year and keep below the central bank’s target range of 2% to 4%.

Looking past increasing inflation pressures, the Philippine central bank – Bangko Sentral ng Pilipinas (BSP) – kept monetary policy loose to support economic recovery and said it expects the policy rate to be on hold until late 2022.

On a similar note, the finance minister of Southeast Asia’s second-biggest economy, Thailand, also recently said that the central bank is widely expected to hold its key interest rate at a record low of 0.50%, adding that “monetary policy must be accommodative to allow fiscal policy to work.”

Last month, Japan also confirmed it would stick to an ultra-easy monetary policy, amid falling consumer prices. Taiwan, similarly, has continued on keeping interest rates steady as expected.