The expected 75 basis point interest rate hike from the Federal Reserve this week will put pressure on its Asian counterparts to accelerate monetary tightening – or risk further outflows and weaker currencies.
An analysis of policy rates in Asia-Pacific relative to their five-year averages shows a high degree of vulnerability in the region, as does an examination of inflation-adjusted interest rates and yield spreads over bonds. of the US Treasury.
The level of threat varies widely, the biggest danger for markets like Thailand, where the central bank has kept rates at an all-time high. South Korea and New Zealand, which moved to initial load hikes early, are better positioned but not immune to problems.
Recent tightening announcements from the unscheduled meetings of the Monetary Authority of Singapore and the Bangko Sentral ng Pilipinas indicate that Asian central banks are likely to make rapid readjustments as inflation bites harder than expected.
Here are three charts showing how pressure is mounting on policymakers across the region to normalize their benchmark rates.
1. Smaller cushion
A 75 basis point hike by the Fed would reduce Indonesia’s policy rate cushion against the United States to just one percentage point, more than five standard deviations below the five-year average spread by 3.3 percentage points. The same gauge for Thailand is at 4 standard deviations. Narrowing credit spreads with the US have fueled net bond outflows from Thailand, Indonesia and Malaysia since early June.
Central banks like those in Australia and South Korea, which have been quicker to raise rates, have reserves closer to their five-year averages. New Zealand is the only country in the region where the buffer will still be larger than the five-year average after a Fed decision of 75 basis points.
2. Impact of inflation
While some Asian central banks have been aggressive in trying to stem price hikes, policy rates adjusted to the most recent monthly inflation figures are still below five-year averages and in negative territory for many. markets in the region.
Inflation hit its highest level in 23 years in South Korea, 21 years in Australia and 14 years in Thailand. And the worst may not be over, as high commodity prices and supply chain disruptions continue to drive up import costs.
The attractiveness of Southeast Asian bonds is at an all-time low, as measured by the spread their yields offer relative to Treasuries. Malaysia’s 10-year government bonds are more than one standard deviation below the five-year average spread.
The spread is also tighter on Thai, Indian and Indonesian bonds. As such, central banks in these countries may need to accelerate the pace of policy tightening to drive yields higher to curb capital outflows and headwinds for their currencies.
Faster rate hikes in South Korea, New Zealand and Australia supported returns, leading to a more attractive spread with the US.
The analysis excludes the central banks of Japan and China. The Bank of Japan is committed to its negative rate and yield curve control policy, while the People’s Bank of China provides ample liquidity as the economy struggles with a Covid-zero policy.