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There's No Stopping the Rise of Asian Interest Rates

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There's No Stopping the Rise of Asian Interest Rates

by Matt Robinson, Moody's Analytics, 19 November 2010
topics:
Risk Management
tags:
Asian interest rates Australia China India Indonesia inflation Korea monetary policy Philippines Singapore Thailand
  • The Bank of Korea resumed monetary policy normalization this week amid emerging inflation pressures.  
  • The Korean central bank's decision foreshadows further monetary tightening across the region.  
  • Despite an uncertain global outlook, accelerating inflation will force Asian central banks to tighten policy.
 
The Bank of Korea’s resumption of policy normalization confirms that inflation is the greater worry in Asia. It also foreshadows a likely round of policy tightening by Asian central banks that have so far been reluctant to raise interest rates amid an uncertain global environment. Moody’s Analytics anticipates that central banks in Indonesia, the Philippines and Thailand, amongst others, will come under increasing pressure to raise rates amid strong inflation pressures and an influx of foreign capital.
 
Korea resumes normalization
At its November monetary policy meeting, the Bank of Korea raised its benchmark policy rate by 25 basis points. While the base rate remains relatively accommodative at 2.5%, accompanying statements by the governor of the central bank suggest monetary settings in Korea will continue to be gradually normalized in light of robust domestic activity and accelerating inflation.
 
After starting to withdraw the monetary stimulus in July, the Bank of Korea almost immediately suspended its interest rate normalization process as the global economic outlook deteriorated. Reluctant to jeopardize the nascent domestic expansion, the central bank left the base rate on hold at each of its subsequent meetings in August, September and October. 
However, consumer price inflation surged to a 20-month high in October, with year-on-year inflation breaching the upper limit of the Bank of Korea’s target band between 2% and 4%. This left little scope for further delays in monetary tightening; the 25-basis point interest rate increase was overdue, given the recent acceleration in inflation. Meanwhile, in the statement accompanying the decision, the central bank dropped its explicit reference to the need to maintain accommodative policy settings, confirming that its focus has shifted from supporting the recovery to containing inflation.
 
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