EM Monetary Policy Outlook – Asia

Mkts Blog_Monetary Policy-ASIA

The “surprise” move by the Monetary Authority of Singapore last week really shouldn’t have come as much of a surprise. Like the rest of the region, Singapore is struggling with deflation risks and sluggish growth. Today, Singapore reported weaker than expected trade data for March, and so easing policy makes perfect sense and follows rate cuts earlier this year by India, Indonesia, and Taiwan. Indeed, outside of Latin America, EM central banks for the most part are in dovish/easing mode.

Over the next several days, we will be publishing our monetary policy outlooks for the different EM regions. Last week, we started with EMEA. Today, we move on to Asia. We believe most of the central banks in the region are in dovish/easing mode. This is due in large part to persistent downside risks to growth, though some countries are flirting with deflation.

China – The People’s Bank of China has been on hold since October 2015, when it cut policy rates 25 bp. The cumulative easing of 165 bp in the 1-year lending rate since November 2014 has had the desired impact, with new loan growth expanding significantly since mid-2015. CPI rose 2.3% y/y in both February and March, the highest since mid-2014 but still below the targeted 3%. The economy continues to slow at a manageable pace, but further easing is likely this year if it gathers too much pace.

India – The Reserve Bank of India restarted the easing cycle with a 25 bp cut in the repo rate this month to 6.5%. It also narrowed its rates corridor by hiking the reverse repo rate 25 bp to 6.0%. March CPI rose 4.83% y/y, the lowest since September and well within the 2-6% target range. The RBI issued a fairly dovish statement after its most recent bp cut, hinting that it is looking for further room to ease. If inflation continues to fall, another cut at the next RBI meeting June 7 seems likely.

Indonesia – Bank Indonesia was in the midst of an easing cycle, but official comments suggest it may be on hold for a little while. The bank just announced that it will use the 7-day reverse repo rate as its new benchmark policy rate beginning in August. At 5.5%, this replaces the old benchmark 12-month reference rate at 6.75%. Officials stress that this is not a stealth easing. Rather, the new rate is meant to make monetary policy more effective because the 12-month reference rate really isn’t tied to money market rates. The next policy meeting is April 21, and no move seems likely.

Korea – The Bank of Korea has been on hold since its last 25 bp cut to 1.5% back in June 2015. CPI rose only 1.0% y/y in March, well below the 2.5-3.5% target range. The ruling Saenari party had pledged to have BOK ease via some form of QE (buying MBS as well as bonds issued by state-run Korean Development Bank), but its election loss will likely put those plans on hold indefinitely. Next policy meeting is April 19, no action is seen then. However, a small minority looks for a 25 bp cut to 1.25% and we acknowledge slight risks for a dovish surprise.

Malaysia – Bank Negara has been on hold since its last 25 bp hike to 3.25% back in July 2014. CPI rose 4.2% y/y in February, the highest since December 2008. While the central bank does not have an explicit inflation target, the high rate will likely keep it on hold for the foreseeable future. Meanwhile, the economy has slowed four straight quarters but growth remains fairly strong at 4.5% y/y in Q4. Next policy meeting is May 19, no action is seen then.

Philippines – The central bank has been on hold since its last 25 bp hike to 4.0% back in September 2014. CPI rose 1.1% y/y in March, well below the 2-4% target range. However, the economy has remained fairly robust, with GDP growth averaging nearly 6% y/y in 2015. Given how low inflation is, the bank will have leeway to cut rates if the economy slows this year. Next policy meeting is May 12, no action is seen then.

Singapore – The MAS just eased policy last week by moving to a policy of no appreciation (zero slope for the S$NEER trading band). This setting for policy was last put into place in 2008 during the financial crisis, so policymakers are clearly concerned about the outlook now. At its last meeting in October, the MAS eased policy slightly by reducing the slope of its S$NEER trading band but it still favored modest appreciation. Next policy meeting will be held mid-October.

Taiwan – The central bank has been cutting rates by 12.5 bp per quarter, with the last cut in March taking the policy rate down to 1.50%. We note that the rate troughed at 1.25% during the depths of the financial crisis in 2009. March CPI rose 2.0% y/y vs. 2.4% in February. This is higher than many countries in Asia, but the central bank does not have an explicit inflation target. With the economy contracting y/y in H2, another 12.5 bp cut is expected at the next meeting June 21.

Thailand – Bank of Thailand has been on hold since its last 25 bp cut to 1.5% back in April 2015. CPI came in at -0.5% y/y in each of the past three months, which is well below the 1-4% target range. However, growth remains quite robust, averaging close to 3% for all of 2015. For now, we think the BOT is on hold but if the economy does slow in the coming months, it will have the ability to resume easing as needed. Next policy meeting is May 11, no action is seen then.