Tightening comes to Asia as South Korea raises interest rates
Bloomberg|
Updated: Dec 01, 2017, 12.18 PM IST
SEOUL: 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% on Thursday. 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, policymakers 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 midsized Asian economies for now. The world’s second- and third-largest economies, China and Japan, are probably some way of 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 fueled 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.
“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, policymakers 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 midsized Asian economies for now. The world’s second- and third-largest economies, China and Japan, are probably some way of 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 fueled 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.
