Central banks in emerging Asia have been given leeway to pause on monetary policy and focus on supporting growth, but pressure to change course could build as their global counterparts become more warmongers and whether inflationary pressures are increasing at home.

India, Indonesia and Thailand kept benchmark interest rates at record highs last week, and the Philippines also held its own on Thursday as it navigated tentative economic recoveries amid outbreaks. continuous viruses.

But a more aggressive tightening cycle in the United States and oil rising to its highest since 2014 could change the thinking of policymakers in the region, most of whom have indicated they plan to remain dovish for as long as needed to put their economies on a more solid footing. A change, which some markets are pricing in earlier than expected, could mean tighter funding conditions and higher borrowing costs.

“Monetary authorities may prefer to wait and see until their economic recovery continues through the first half of 2022,” said Steve Cochrane, chief APAC economist at Moody’s Analytics. “But there is a risk that they have to act sooner than expected.”

At the Group of 20 meetings of central bankers and finance ministers this week, Bank Indonesia Governor Perry Warjiyo urged his counterparts to coordinate the exit from pandemic-era policies to save themselves. ensure that emerging economies do not suffer fallout that will limit their ability to sustain the recovery.

Room to grow

Certainly, the region has sufficient levels of foreign exchange reserves to protect against volatility if the US Federal Reserve raises interest rates by 50 basis points at its March meeting, as some expect. India and Thailand, where food and fuel prices are on the rise, also expect inflation to return to the target range later this year.

However, some Asian central banks could fall behind as pandemic risks recede, economic activity normalizes and output gaps narrow, Nomura Holdings Inc. said in a report. A pivot in central bank policies could be near, he added.

Inflation could be the deciding factor in India, where policymakers have defended their optimistic view. The Reserve Bank of India’s decision last week to keep the repo rate unchanged surprised markets, which expected the bank to hike rates to begin policy normalization.

Overnight index swaps are currently pricing around 36 basis points of policy rate hikes in India over the next three months, up from 27 basis points at the end of last year, signaling rising traders’ expectations. a stricter policy. Meanwhile, the rupee is the worst performing Asian currency so far this year, down around 1% against the dollar.

“While the RBI has played down inflation risks during the pandemic, the catch-up could also be much faster, if inflation does not fall towards 4% by the end of 2023, as the RBI now expects,” said declared Nomura.

Not phased

In Thailand, inflation accelerated to 3.23% in January, beating economists’ estimates for a gain of 2.47%. That sent two-year non-deliverable interest rate swaps up 22 basis points to a nearly two-year high, a break from earlier market moves that signaled more dovish expectations for the Thai central bank.

Indonesia will likely be more sensitive to the Fed’s hike cycle, consistent with its goal of maintaining stability in its financial system. Higher-than-expected U.S. inflation could pose new questions for Bank Indonesia, which on Feb. 10 said it expects the Fed to hike rates by a total of 100 basis points this year. , which is below market projections.

The latest U.S. data point “may have been deep enough to alert BI to the increased likelihood of an early-period fed funds rate hike,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. sharp increase in the chances that BI will have to raise rates of its own volition in March as well.

In the Philippines, Governor Benjamin Diokno said Bangko Sentral ng Pilipinas did not need to keep pace with the Fed and was in no rush to tighten monetary policy. But with Oil approaching the crucial $95 level for the BSP, it may prove difficult to maintain this position indefinitely.

Diokno dropped a hint of unwinding of pandemic support measures at Thursday’s meeting, saying: “We will commit to exit when we start to see, based on our assessment, evidence of a sustained recovery. and/or a growing risk of inflation”.

“Some central banks appear to be much more relaxed than perhaps reasonable in the context of rising global and domestic inflation,” said Robert Carnell, head of Asia-Pacific research at ING Groep NV. “We are likely to see the markets react by rewarding more currencies from more proactive central banks.”