The inflation and interest rate picture in Asia-Pacific remains mixed. In many economies, modest core inflation momentum suggests limited or no further monetary policy tightening this year.
But in some economies, recent hefty increases in core prices are forcing central banks to consider more rate hikes. Australia, New Zealand, and the Philippines belong in this group, in our view.
This is according to a report published today, titled, “Asia-Pacific: It’s A Mixed Bag For Inflation And Rate Implications” by S&P Global Ratings focussing on the outlook for interest rates and inflation in the region.
“Amid lower energy and commodity price pressure, the recent low pace of sequential core inflation in most Asia-Pacific economies implies central banks won’t have to raise policy rates much this year,” said Asia-Pacific Chief Economist Louis Kuijs.
However, we should be cautious about expectations of a steady decline in U.S. inflation. The labour market there is strong; unemployment remains low, and wages are rising briskly.
“Indeed, we expect the U.S. Federal Reserve to raise the policy rate above 5% this year. We also see the market expectations of rates falling meaningfully later in 2023 as unrealistic,” Kuijs said.
The decline in sequential U.S. core price increases is nonetheless welcome. If it continues, year-on-year core inflation will retreat.
In China, we expect the increase in consumer inflation this year to remain moderate and don’t think the People’s Bank of China will raise its policy rate this year.
For Japan, we think some small monetary policy tightening is possible later this year.
The central banks of Korea, Indonesia, and Taiwan have broadly finished raising rates, in our view.
Conversely, in Australia, New Zealand, and the Philippines elevated core inflation in recent months is fuelling expectations of further policy rate increases.
“The coming six months are likely going to show significant differentiation in central bank policy moves, depending on the domestic inflation trajectory, with some countries raising rates as others stay pat,” Kuijs said.
