Fed hike to intensify market risks for Asian central banks

The expected 75-basis-points interest rate increase from the Federal Reserve this week will heap pressure on its Asian counterparts to speed up monetary tightening -- or risk further fund outflows and weaker currencies.

An analysis of policy rates in Asia Pacific versus their fiveyear averages shows a high degree of vulnerability across the region, as does an examination of interest rates adjusted for inflation, and yield spreads versus US Treasuries.

The level of threat varies considerably, with the most danger for markets like Thailand, where the central bank has kept rates at a record low. South Korea and New Zealand, which moved early to front load hikes, are better placed but not immune to trouble.

Recent tightening announcements from unscheduled meetings of the Monetary Authority of Singapore and the Bangko Sentral ng Pilipinas indicate that Asia’s central banks are susceptible to making rapid readjustments as inflation bites harder than expected.

A 75-basis-points hike by the Fed would narrow Indonesia’s

US Fed is likely to raise the rate by 75-basis-points

policy-rate buffer versus the US to just one percentage point, which is more than five standard deviations below the fiveyear average gap of 3.3 percentage points. The same gauge for Thailand stands at 4 standard deviations. Narrowing rate differentials with the US have fueled net bond outflows from Thailand, Indonesia and Malaysia since early June.

Central banks such as in Australia and South Korea, which have been quicker to increase rates, have buffers that are closer to their five-year averages. New Zealand is the only country in the region where the buffer will still be bigger than the five-year average after a 75-basis-points Fed move.

While some Asian central banks have been aggressive in trying to head off price gains, policy rates adjusted for most recent monthly inflation figures are still below the five- year averages and in negative territory for many markets in the region.

Inflation has risen to the highest in 23 years in South Korea, 21 years in Australia and 14 years in Thailand. And the worst may not be over as elevated commodity prices and supply-chain disruptions continue to drive up import costs.

On the flip side, inflation in India may begin to moderate due to monsoon rains progressing well for agriculture, which may ease pressure on rate hikes, according to Credit Suisse Wealth Management.

The allure of Southeast Asian bonds is at a low ebb as measured in the spread their yields offer over Treasuries. Malaysia’s 10-year government bonds are more than one standard deviation below the five-year average gap.

More rapid rate hikes from South Korea, New Zealand and Australia have supported yields, resulting in a more attractive spread to the US.

AFP

The global economy is facing a worrisome slowdown, but the critical priority for policymakers is to bring raging inflation under control, the IMF’s chief economist said Tuesday.

With price surges in major economies approaching 10%, central banks must stay the course and continue to raise interest rates until inflation retreats, Pierre-Olivier Gourinchas told AFP in an interview.

The International Monetary Fund’s updated World Economic Outlook offered a gloomy picture of the global economy, which is slowing sharply and faced with a series of risks that could push it into recession.

Soaring prices for food and fuel, exacerbated by the war in Ukraine, have been squeezing family budgets worldwide, and even leading to unrest in some countries.

Aggressive moves by central bankers, including the US Federal Reserve and European Central Bank, are aimed at taming those price pressures, but will also slow the economy.

However, Gourinchas warned that allowing inflation to get out of control is “like (letting) the genie out of the bottle.”

If people come to expect inflation will remain high, “this will be a world in which central banks have lost the plot. And it will be very, very difficult to walk that back.”

But fortunately, “we’re not there” yet, he said.

So far, “inflation expectations have remained quite stable. And this is one of the great benefits of having had decades of low inflation environment and credibility by central banks.”

He acknowledged that there is a risk policymakers will do too much and slam the brakes on growth, but so far they are on the right track.

“The point is not to inflict a