Global monetary conditions are likely to continue tightening, even with the Fed showing incipient signs of dovishness. The Bank of Japan (BOJ) will soon join the posse of central banks withdrawing monetary stimulus, with BOJ Governor Kuroda recently signalling a peak to easing. Meanwhile, the European Central Bank (ECB) remains on track to end its asset-purchase programme by end-2018, and will embark on a hiking cycle tentatively in 3Q19.
The sustained normalisation of policy across major central banks around the world compels Asian central banks to follow suit – the omnipresent desire to foster growth has to be balanced with the risks of lagging behind, as asset prices could be dented as capital flows exit riskier emerging markets. Throw in currency volatility into the mix and Asian central banks have a tall order on their hands.
It is against this fraught backdrop that we examine the outlook for monetary policy in Asia.
• China: With the bruising trade war with the US weighing heavy on domestic sentiment, the People’s Bank of China (PBOC) has loosened monetary and liquidity conditions via instruments such as the medium-term lending facility (MLF) and required reserve ratio (RRR). Notably, the recently published monetary policy report for 3Q18 saw the PBOC omitting a phrase stating its previously held opposition to concerted stimulus efforts – potentially setting the stage for further easing via liquidity and credit channels. In short, further easing is on the cards as Beijing’s diktats pivot away from reforms to growth while a semblance of stability (still) persists.
• India: Price pressures have been relatively quiescent in 2H18, as upside risks to inflation, stemming from dearer oil prices in 1H18, second-order effects from the Housing Rent Allowance (HRA) disbursements, the new Minimum Support Price (MSP) scheme unveiled by the Modi government did not materialise. In addition, a normal monsoon has made for benign food prices. That said, the Reserve Bank of India (RBI) is likely to remain vigilant in monitoring inflationary pressures, as evinced by its shift in policy stance to “calibrated tightening” and a downgrading of inflation projections to 3.9%-4.5% in 2HFY19, from 4.8% previously. We expect the RBI to hold
steady in the remainder of 2018, before enacting two rate hikes to in 2019.
• Indonesia: Inflationary pressures are unlikely to rear their head in the archipelagic economy going forward, given the imposition of price caps on fuel and electricity, middling growth rates in the 5% range and a weak exchange-rate pass though. Bank Indonesia (BI) too has adjusted down its forecast for full-year inflation in 2018 to come in at 3.2% (from 3.4% previously). Nevertheless, BI is poised to keep rates on ice in what remains of 2018, before pencilling in another three more 25bps rate hikes in 2019 that will be spread out over the course of the year.
• Thailand: While the Bank of Thailand (BOT) has kept rates on ice since 2015 at the near-record low level of 1.50%, an increasing number of committee members are plumping for a rate hike, even though they remain in the minority for now. BOT governor Veerathai Santiprabhob has also dropped hints that the BOT is on the cusp of raising the policy rate in light of improving economic conditions. In our view, interest rate normalisation in the US as well as mounting financial vulnerabilities will compel the BOT to embark on a rate hike cycle of its own beginning in December 2018, with another hike scheduled for 2H19.
• Singapore: In October 2018, the Monetary Authority of Singapore (MAS) opted to slightly appreciate the slope of the S$NEER policy band, with no change to the width and centre-point of the band. Our calculations pinpoint a small, positive output gap amid headline inflation that is trending higher. However, non-tradable inflation, which stems from domestic demand, remains in near-zero territory and could indicate a less-than-robust recovery in domestic sectors even as external-oriented parts of the economy do better. However, even non-tradable inflation should begin to rise as the labour market tightens further. In light of steady economic growth, we think that the MAS will persist in its gradual tightening of the monetary policy band in the decision due
for April 2019.
• Malaysia: Elusive price pressures meant that Bank Negara Malaysia (BNM) was able to keep monetary policy unmoved for much of 2018. Going forward, the replacement of the Goods and Service Tax (GST) with the Sales and Service Tax (SST), alongside the implementation of targeted fuel subsidies, should act to constrain prices. Moreover, tight public purse-strings rules out any stimulus spending by the government to shore up growth in the near-term. We think that the BNM is unlikely to withdraw the monetary punchbowl anytime soon; policy rates may stay at their current levels through 2019.
• The Philippines: The Bangko Sentral ng Pilipinas (BSP)’s tardiness in tightening the monetary spigot at the beginning of 2018 resulted it in having to play catch-up on the policy front, hiking rates by 175bps within six months to tamp down on inflation which had reached multi-year highs on a confluence of factors, stemming from high oil prices, a weak Peso as a result of financial turbulence, and the tax hikes mandated under TRAIN law. Looking ahead, the softer headline inflation print in November may embolden doves within the BSP. We expect the BSP to hold off on a further rate hike at their next meeting, which will then pave the way for a reversal in 2019 of its aggressive rate cuts enacted this year. On current reading, we expect the BSP to raise rates three times in 2019.
Assessment: Normalisation of policy in lockstep with the Fed
In summary, we expect most Asian central banks to continue to raise policy rates in 2019 as global
monetary conditions continue to tighten on the concerted actions of major central banks in the G3.
Should growth falter, monetary accommodation is unlikely to ride to the rescue; instead, proactive
fiscal policy and other administrative measures will kick in.