Rising global economic volatility is leading Asian central banks to put the brakes on their strategy of monetary tightening and could even lead them to reverse the policy, believes Nomura.
The region’s interest rates were eased heavily during the global financial crisis of 2008-2009 but as the region recovered much faster than expected central banks began tightening again to control rising inflation, spurred in part by the US’s quantitative easing.
But a mixture of the eurozone sovereign debt crisis and a stagnant US economic recovery has led that era of tightening to come to a close, according to Nomura.
“Given the market turmoil and worsening economic outlook in the G3, we no longer expect rate hikes in China, Indonesia, Malaysia, the Philippines, Thailand and Australia,” said Tomo Kinoshita, deputy head of Asia economics for the Japanese bank, in an August 26 report. “For most countries, we see only 30% or less chance of further rate hikes this year.”
However, Kinoshita does not believe that monetary tightening is over in the longer term. He believes that Asian rates have not yet normalised from the loose monetary policy employed during the crisis, and that real interest rates remain negative in many Asia Pacific markets once headline consumer price inflation is considered.
Asian central banks and governments could even loosen economic policy if the situation in global markets worsens, believes Kinoshita. China, Indonesia, Hong Kong and Singapore have more fiscal firepower in this scenario due to healthier fiscal positions, according to the report.
The People’s Bank of China (PBoC) effectively tightened policy again on August 26 when it issued a circular that ordered local banks to submit required reserves on their margin deposits, according to an August 29 report from HSBC.
The London-headquartered bank believe this to be equivalent to hikes in the reserve requirement ratio (RRR) of 100 to 150 basis points, and thus expects no more actual RRR hikes this year.
However, HSBC believes that Beijing still views curbing inflation as its top priority and is less concerned about global macroeconomic instability—although it added that the PBoC could inject liquidity by RRR cuts if needed.
“We believe concerns on over-tightening are unwarranted as the central bank could inject liquidity to offset a potential liquidity crunch in the money market if necessary,” said the report. “Further, we are not seeing any mounting risk of a collapse in growth ... this is likely to be the last meaningful step towards credit tightening.”