In the face of global inflation, Asian economies have joined Canada and New Zealand in boosting interest rates.
Singapore and South Korea both tightened monetary policy on Thursday, following rate hikes in Canada and New Zealand, as global officials scrambled to keep skyrocketing inflation from derailing the fragile global recovery.
While the four central banks began tightening policy last year to combat price increases caused by coronavirus-related logistics bottlenecks, the war in Ukraine, which began on February 24, has since exacerbated supply pressures, making it even more urgent for policymakers to move rate hikes forward.
More Asian central banks are expected to bring interest rate hikes forward, according to Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo.
“This could hamper growth, but with inflation becoming a greater concern, they don’t have much of a choice but to tighten monetary policy.”
Because Asia Pacific countries trailed behind the United States and Europe in their recovery from the epidemic, central banks in Australia, India, and Southeast Asia have viewed inflationary pressures as sporadic, focusing instead on bolstering their recovery.
The outliers were Singapore, South Korea, and New Zealand, who were concerned about rising import prices and financial stability in general.
On Thursday, the Bank of Korea surprised the market by raising interest rates by a quarter of a percentage point.
Most economists anticipated it to wait until a new governor was appointed before acting, but with inflation in Asia’s fourth-largest economy at a decade high, the bank decided that waiting was not an option.
Meanwhile, Singapore tightened its monetary policy, which affects its currency rather than interest rates, for the third time in six months, citing new dangers posed by the Ukraine conflict.
Both meetings took place less than a day after commodity-rich nations New Zealand and Canada raised their interest rates by half a percentage point, the highest increases in more than two decades.
The increase in New Zealand exceeded analysts’ expectations, and Canada warned that more might be required.
‘Get there quickly, then take it easy.’
Singapore, South Korea, New Zealand, and Canada, according to Vishnu Varathan, head of economics and strategy at Mizuho Bank, are part of a group that sees an urgent need to get ahead of the inflationary threat.
“The so-called ‘Kokomo Club’ of central banks, which strive to ‘get there quick, then take it leisurely,’ are compelled to front-load tightening, with 50 basis point hikes as a characteristic,” Varathan added, alluding to the Beach Boys’ 1988 classic “Kokomo.”
While larger counterparts such as the Federal Reserve and the European Central Bank were not quite as bold in their rhetoric, he said they were going in that way.
Many economies are facing a dilemma in that they have just recently begun to entrench a steady recovery from big pandemic-driven downturns, despite the fact that inflation has forced their hands because to concerns that rising prices may cause broader financial and price instability.
Even Asia’s less hawkish central banks are feeling the push to reverse their crisis-era policies.
The Reserve Bank of Australia kept rates last week, but removed a reference to being “patient” in monitoring economic developments from its communication.
With unemployment at a 13-year low, Australia’s labor market remains exceptionally tight, and markets are now anticipating the first rate hike since the pandemic began in June.
Last week, India’s central bank kept rates at a record low, but signaled a shift away from ultra-loose policy.
While the economic impact of the Ukraine war has so far been largely measured in inflationary terms, with oil and food prices skyrocketing, analysts warn that policymakers should pay particular attention to the impact on growth.
Shane Oliver, AMP Capital’s head of investment strategy and chief economist, compared the current situation to the 1973 Saudi oil embargo, which produced a global price shock.
“The longer this goes on, and it’s been a year now, inflationary expectations rise, and inflation becomes self-perpetuating, much like it did in the 1970s,” he said.
Source: Reuters
