August 9, 2022

Inside Asia: For Bankers, a Week of Difficult Calls

SINGAPORE — Predicting the next interest rate moves out of South Korea or China was hard enough before the global economy wobbled. Now it’s looking like a coin toss.

Five central banks in the Asia-Pacific region hold policy-setting meetings this week — Australia, New Zealand, Indonesia, South Korea and Sri Lanka. All except South Korea are expected to remain on hold, and even the economists forecasting a Bank of Korea rate increase acknowledge that it has become a close call.

Even if they all stick to the script, officials’ comments merit careful parsing for any indication about how they interpret the recent run of weak economic data. Is it merely a Japan-induced, short-lived lull or something more worrisome?

Policy makers must balance powerful, conflicting forces: The softening global outlook cools exports and therefore growth prospects, but home-grown demand remains strong in most countries, keeping up the inflationary pressure.

Richard Prior-Wandesforde, a Credit Suisse economist in Singapore, said that as long as inflation remained uncomfortably high and interest rates below normal, most Asian central banks would keep tightening monetary policy to reduce the flow of cheap credit. China, South Korea, India and Thailand may be even more aggressive than investors expect, he said.

“We only expect the region to suffer a few quarters of subtrend growth, not a return to recession,” Mr. Prior-Wandesforde said. “In fact, economic activity is unlikely to be soft enough to put an end to Asia’s rate-hiking cycle for a few months yet.”

But for central bankers inclined to put more emphasis on growth than inflation, even a modest slowdown may be reason enough to delay tightening. U.S. employment softened last month, and businesses around the world trimmed factory orders, so export-focused economies have reason for concern.

South Korea is arguably the toughest call. The Bank of Korea has developed a reputation for unpredictability, and it surprised markets yet again at its May meeting by holding rates steady. But it was a split decision, with two of the six board members expressing concerns about rising inflation expectations.

Many economists expect a quarter-point increase at the bank’s meeting Friday as steep food and energy costs filter into the prices of other goods and services. Core inflation, which excludes food and energy prices, has crept higher.

Doubts, however, are growing. Nomura dropped its call for a June rate increase, arguing that the Bank of Korea seemed more concerned about the risk of faltering growth than about inflation.

“The inherently pro-growth Korean government may have influenced the B.O.K.’s monetary policy,” said Young Sun Kwon, Nomura’s senior Korea economist in Seoul.

Jiwon Lim, a JPMorgan Chase economist also based in Seoul, is sticking with a forecast for a rate increase this week but said it “now becomes a close call” after the recent run of weak economic data.

Australia’s rate decision is also looking like less of a sure thing than it was a week ago, when the government released data showing that flooding had pushed first-quarter economic output down 1.2 percent, slightly worse than economists had expected.

Although economists are still banking on no change to monetary policy, some think the Reserve Bank of Australia might want to burnish its inflation-fighting credentials by springing a surprise interest rate increase Tuesday.

Even if it holds its fire at this meeting, the Reserve Bank of Australia will probably lay the groundwork for higher rates soon. Inflation accelerated in the first quarter despite the negative reading on growth, and with unemployment at a tight 4.9 percent, the economy does not have much slack.

It is a very different story in Indonesia, where economists expect no change in monetary policy. Inflation readings have looked benign, helped by Jakarta’s subsidies for fuel, keeping consumer prices down.

The global cooldown has taken some of the pressure off commodity prices, particularly for oil. That will eventually filter into Asian economies and reduce concerns about overheating. Indeed, many economists think inflation will peak soon.

But that does not mean central bankers can afford to wait it out. China in particular has a few tricky months to navigate before it can be sure that inflation will not go higher.

Drought and power shortages mean China’s food and energy costs may keep rising even after global prices begin to fall. Although Beijing raised power prices last week, a move that could make it more cost-effective for energy companies to increase production, demand is still running far ahead of supply.

Jian Chang, a China economist for Barclays in Hong Kong, said Beijing probably would not deviate from its planned tightening course and could raise rates before it releases May consumer price data next week.

Still, for central bankers already leaning toward keeping monetary policy looser, the combination of inflation peaking and growth slowing may be too much temptation.

Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong, said the bad economic news did not justify a pause in the tightening cycle, pointing out that interest rates in the region remain “structurally far too low.”

“But, central bankers may see something nastier on the horizon and opt to hold. This week will bring important clues as to what they are thinking,” Mr. Neumann said.

Emily Kaiser is a Reuters correspondent.

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