Will Asia follow the Fed in 2018?
Interest rates might be on the rise in North America, but Asian central banks are seen unlikely following their lead in 2018, analysts say.
Interest rates might be on the rise in North America, but Asian central banks are seen unlikely following their lead in 2018, analysts say.
Nowhere has the spectre of tighter credit spooked investors more than in the United States, where a sharp rise in wages caused bond yields to surge and stocks to slump. Already expecting three interest rate increases in 2018, traders have raised their expectations of further hikes should the US Federal Reserve need to scare off the inflation ghoul.
Similarly, the Bank of Canada recently hiked its official interest rate to 1.25 per cent, following previous increases in July and September. Across the Atlantic, the Bank of England has warned that a rate hike could come as early as May, while the European Central Bank is also gradually tightening policy.
Yet in Australia and across Asia, the region's central banks seemingly remain largely unconcerned with the prospect of rising prices.
"Inflation isn't really an issue at the moment in Asia," says Singapore-based Robert Mann, senior portfolio manager, Nikko Asset Management.
"I can't see countries wanting to raise rates to slow their economies because growth is too strong. And on the current account side, while clearly Australia and New Zealand have current account deficits, in Asia it's really only Indonesia and India, and they're both under 2 per cent of GDP."
Mann suggests fears of capital flight similar to the "taper tantrum" of 2013 are overblown, given that much of the investment in Asia is related to Asia's growth prospects rather than chasing yield.
"You might get more worried over a correction in the equity market, and some of the passive exchange-traded fund inflows into Asia will get shaken up by that … but it's only if the Fed raises rates a whole lot more than expected," he said.
"I see inflation ticking up a little bit this year … but it's only if there's a real sign that core inflation has got a head of steam up, where the Fed has to act more quickly such as in 1994, that might change the outlook. I don't see any sign of that at the moment."
In general, Mann said a combination of strong economic growth and easy liquidity along with a weak US dollar would result in a continued favourable outlook for Asian equities and currencies.
Capital Economics analysts also see rate rises as "the exception rather than the norm" for emerging Asia in 2018.
"Malaysia and Pakistan have both hiked interest rates over the past week, and while the consensus and financial markets are expecting most other central banks in the region to tighten policy in 2018, we think rates in the majority of countries will either be cut further (China, Indonesia and Sri Lanka) or remain on hold," the London-based consultancy said in a 30 January report.
"Even for those where we are expecting hikes later this year (Korea and India) we are pencilling in only gradual tightening."
The consultancy said most Asian central banks would be in little hurry to raise interest rates this year, due to growth having peaked in a number of countries and inflation staying low.
"It is notable that of the countries to have published [fourth-quarter] GDP figures (Singapore, the Philippines and Korea), growth slowed in all three," it said.
Meanwhile, inflation is seen staying low across emerging Asia, with the exception of Pakistan, which faces a "precarious" external position.
Mixed data
The latest data points to a mixed picture across the region.
China saw a pickup in inflation data in December and consumer inflation could reach 2.6 per cent in 2018, triggering another rate hike, ANZ Research said. The Australian bank sees China's 10-year government bond yield reaching 4.35 per cent by year-end amid rising prices of food and services.
The Philippines central bank could also commence tightening in March due to a significant rise in inflationary expectations. With the latest data showing a headline inflation rate of 4 per cent, the central bank's target range of 2 to 4 per cent could soon be tested, ANZ warned.
Yet in contrast, recent soft inflation data from Indonesia, Singapore, South Korea and Thailand points to a general lack of pricing pressures across the region.
In Japan, monetary policy is seen remaining ultra-easy, following the reappointment of Bank of Japan governor Haruhiko Kuroda for his second five-year term from April.
The 73-year-old has masterminded Japan's aggressive quantitative easing to battle deflation and is unlikely to deviate, particularly with the bank's target inflation rate of 2 per cent yet to be achieved. Japan's latest GDP data also showed the economy slowing in the December quarter to a 0.5 per cent annualised expansion, albeit maintaining its economic winning streak for the eighth straight quarter.
Meanwhile, the central banks of both Australia and New Zealand appear unlikely to increase interest rates any time soon, given weak inflation and wages data, and record household debt levels.
"Wages growth and inflation are expected to remain subdued and below trend. This means it is unlikely the Reserve Bank of Australia will lift interest rates in the first nine months of 2018 and possibly not at all in 2018," said Morningstar's head of equities research, Peter Warnes.
As Warnes has suggested, patient investors can take advantage of equity market sell-offs by acquiring quality companies, remembering that "interest rates are going to rise from current historical lows".
Yet with Asia's growth and inflation outlook differing markedly from North America, the region's central banks appear in no hurry to join the higher rates brigade in the Year of the Dog.
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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.
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