Tightening comes to Asia

South Korea raises interest rates

HONG KONG: The global monetary policy tightening cycle has arrived in Asia, with South Korea becoming the first major central bank in Asia to tighten since 2014. While others may be set to follow, the ascent will be gradual.

South Korea, home to the world’s biggest maker of smartphones and memory chips and a powerhouse manufacturer of everything from cars to ships, raised its benchmark rate to 1.5% yesterday.

But governor Lee Ju-yeol made it clear he’s in no hurry to raise rates again, telling reporters that policy will remain accommodative.

“So long as CPI inflation stays benign – our base case – it should be a very gradual tightening cycle in Asia,” said Rob Subbaraman, chief economist for Asia at Nomura Holdings Inc in Singapore.

“With high domestic debt, many Asian countries’ domestic demand is more sensitive to rate hikes than before. It is important to note that this is reducing accommodation. Asian monetary policy is far from tight.”

With debt levels surging, policy makers in the region are keen to use a period of faster economic growth to move interest rates from record lows. But those debt levels mean each rate increase could be painful, dictating a softly-softly approach.

And the trend is likely confined to the small and mid-sized Asian economies for now. The world’s second- and third-largest economies, China and Japan, are probably some way off tightening, Tom Orlik of Bloomberg Economics said in an email. The People’s Bank of China is focused on a campaign to rein in risk in the financial system rather than inflation, while the Bank of Japan remains a long way from its 2% inflation target. India, meanwhile, is focused on stoking growth.

Still, a surge in trade fuelled by demand for electronics goods has proved more durable than expected, sending Asian exports to record levels and boosting corporate profits and economic growth. If those trends are sustained into 2018, Asia’s central banks are set to start falling in line with a global shift toward higher borrowing costs.

“The Bank of Korea move is a reminder that the recovery in global trade has changed conditions for Asia’s exporters,” Orlik said.

As for who may be next in Asia to raise interest rates, there are two top contenders.

In Malaysia, a booming economy has prompted some economists to predict Bank Negara may raise interest rates as early as its first meeting of 2018 on Jan 25, even as inflation remains contained.

A recovery in exports and strong growth in consumption fuelled the economy’s 6.2% expansion last quarter, the fastest pace since 2014.