Central Asia`s banks to follow Fed in raising rates

In a note published last week, the economists wrote that most monetary authorities in EM Asia would likely stick to their own pace and pay more awareness to domestic demand recovery with minor concerns of falling behind the curve.

Global markets have witnessed a wave of volatility as investors reposition in expectation of numerous rate hikes from the Federal Reserve this year. That scenario has in the past hurt Asia’s emerging economies as it pushes the dollar and U.S. Treasury yields higher, potentially spurring capital flight from the region.

But the Bank of America economists expressed there are three reasons central banks in emerging Asia can “cool their feet for longer”:

Modest consumer inflation

Annual CPI inflation is anticipated to stay broadly in line with the policy targets, which warrant regional central banks to adjust monetary policies at their own pace, in their view.

Subdued domestic demand growth

“Our current forecasts suggest that the average EM Asia GDP increase during 2020-22 will remain below the pre-coronavirus trend. The U.S. and E.M. ex-Asia did much better sealing their output gaps by comparison.

Foreign exchange reserves and current account balance

They are covering pressure from the capital outflow. F.X. reserves persisted in growing in EM Asia, notwithstanding the sharp capital outflow in 2020. EM Asia also runs a current account surplus in expansion, even as a net commodities importer.

China’s economy was one of the foremost globally to return to growth during the epidemic’s first year. Nevertheless, the subsequent withdrawal of stimulus and policy tightening has led to a sharp deceleration in domestic demand.

Recent monetary policy announcements have demonstrated great patience by the central banks of Thailand, Malaysia, Indonesia, and the Philippines, Mizuho economist Tan Boon Heng stated in a note last week.

The Bank of Thailand, Bank Negara Malaysia, and Bank Indonesia have continued on key interest rates, which Tan attributed in part to a shortage of and lagged growth recovery in those countries.

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