Interest Rates: Rising Again Across Asia

by David L. Cohen, Action Economics, 15 July 2010

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Risk Management

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economic rebound GDP growth interest rates monetary tightening stimulus

Central banks in Korea, Malaysia and Thailand raised interest rates in the past two weeks, joining other recent tightening by central banks in India, Taiwan and Australia. We view this as a vote of confidence that Asian economies will continue to pace the global rebound, weathering any drag from the European debt crisis.

Conspicuous in their absence are Japan and China, the two largest economies in the region, which have yet to raise rates. The Bank of Japan is widely expected to maintain its overnight rate at near-zero indefinitely in the face of lingering deflation.

The People’s Bank of China represents perhaps the biggest question mark, having refrained a little longer than originally expected from tightening rates, but taking other steps to rein in money and credit growth. On another front, last month opened the door for gradual FX appreciation of their currency. We see China as likely to begin raising interest rates sometime during the second half of this year.

Economic rebound

Asia has paced the global turnaround, with most nations swinging to positive quarter-on-quarter GDP growth in the second quarter of 2009, continuing into the first quarter of this year. Monthly data suggest that second quarter GDP reports will show healthy growth sustained through mid-2010. Singapore has just reported a 19.3% year-on-year GDP growth in the three months to June, while China said its GDP expanded 10.3% in the same period.

The reversal of the run-up in commodity prices, together with the ballooning in excess capacity in the face of the economic slowdown, initially provided considerable relief on the inflation front. Inflation typically slowed to multi-year lows during 2009, with many economies posting year-on-year declines for at least a few months, even if understating the underlying sequential pace of inflation.

Although by late-2009 inflation was generally swinging positive year-on-year, as the year-ago comparisons became less flattering, inflation generally remains fairly well contained.

India

The exception on the inflation front has been India, where the wholesale price index (WPI), utilised by the central bank as the broadest inflation gauge, rose to +11.0% year-on-year in April. That’s the highest since October 2008 and sharply up from -1.0% year-on-year in June 2009.

In addition to the base effect in comparison with the swing in global commodity prices a year earlier, the WPI has been boosted by food prices rising nearly 20% year-on-year in early December (though easing to 12.6% year-on-year through 26 June), under pressure from shortages as dry monsoons cut farm output.

But Indian economic growth has been impressive, with GDP bouncing +8.6% year-on-year in the first quarter after annual growth of +6.8% year-on-year in calendar 2009. Growth is projected at +8.5% year-on-year in 2010, trailing only China among the major economies. In this environment, the Reserve Bank of India has hiked its repo rate by 25 basis points three times beginning in March.

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