EM Monetary Policy Outlook – Asia

Mkts Blog_Monetary Policy-ASIA

The surprise UK Brexit result is a game-changer for EM. While the ultimate economic impact has yet to be felt, markets are braced for bad news ahead. Likewise, we think that EM policymakers will prepare for a less friendly global growth and investment backdrop. As such, easing policy (or at least leaning more dovish) makes perfect sense until the global outlook becomes clearer.

This week, we will be publishing our updated monetary policy outlooks for the three major EM regions. Yesterday, we started with EMEA. Today, we move on to Asia. We believe most of the central banks in this region were already in dovish/easing mode ahead of the Brexit vote. This was due in large part to persistent downside risks to growth, though some countries are also flirting with deflation. Yet with Brexit posing further risks to global growth, most central banks in this region are likely to continue (or in some cases, start) easing in H2.

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 2.0% y/y in May, the lowest since January and well below the targeted 3%. The economy continues to slow at a manageable pace, but further easing is possible this year if the slowdown gathers too much pace.

India – The Reserve Bank of India restarted the easing cycle with a 25 bp cut in the repo rate back in April to 6.5%. It also narrowed its rates corridor by hiking the reverse repo rate then by 25 bp to 6.0%. Price pressures are rising again, with CPI inflation at 5.76% y/y in June and nearing the top of the 2-6% target range. This led the RBI to stand pat at the June meeting, and another cut at the next RBI meeting August 9 seems unlikely. That will be Governor Rajan’s final meeting, with his successor (whoever that may be) helming the meeting after that on October 4. Given the criticism of Rajan for being too hawkish, we suspect Modi will appoint someone more dovish who will continue cutting rates.

Indonesia – Bank Indonesia was in the midst of an easing cycle, but it then paused in April and May before surprising markets with a 25 bp cut in the benchmark 12-month reference rate to 6.5% in June. The bank recently announced that it will use the 7-day reverse repo rate as its new benchmark policy rate beginning in August, and this rate was also cut 25 bp in June to 5.25%. 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 July 21, and no move seems likely then after the surprise June move. However, easing is likely to continue at the August meeting.

Korea – Before its surprise 25 bp cut in June, the Bank of Korea had been on hold since its last 25 bp cut to 1.5% back in June 2015. There were four new members on the seven-member MPC at that meeting, and they clearly lean more dovish than their predecessors. The next policy meeting is July 14, and another cut is likely then. The government just announced new fiscal stimulus whilst cutting growth and inflation forecasts for 2016.

Malaysia – Bank Negara has been on hold since its last 25 bp hike to 3.25% back in July 2014. CPI rose 2.0% y/y in May, the lowest since April 2015. While the central bank does not have an explicit inflation target, low inflation will give it cover to ease if the economic outlook worsens. Meanwhile, the economy has slowed four straight quarters and the 4.2% rate posted in Q1 is the lowest since 2009. The next policy meeting is July 13, and no action is seen then. One lone analyst sees a 25 bp cut to 3.0%, though that view should gain more traction in H2.

Philippines – The central bank has been on hold since its last 25 bp hike to 4.0% back in September 2014. CPI rose 1.6% y/y in May, 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 August 11, no action is seen then.

Singapore – The MAS eased policy in April by moving to a policy of no appreciation (zero slope for the S$NEER trading band). This setting for policy was last put into place in 2008 during the financial crisis, so policymakers are clearly concerned about the outlook. At the previous meeting last October, the MAS eased policy slightly by reducing the slope of its S$NEER trading band while still favoring modest appreciation. Next policy meeting will be held mid-October, and another easing move is possible if the slowdown deepens.

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. CPI rose 1.2% y/y in May, the lowest since January, though 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 to 1.375% at the next meeting June 30.

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 May. Though this is the highest since December 2014, it is still below the 1-4% target range. However, growth remains quite robust, coming in at 3.2% y/y in Q1 after averaging close to 3% in 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. The next policy meeting is August 3, and no action is seen then.