Blog Asian Central Banks Fear Deflation

Asian Central Banks Fear Deflation
The sharp drop in the oil price has fuelled disinflationary pressures already prevalent in several Asian economies.

“There is a downturn in the domestic credit cycle caused by decelerating consumer demand,” said Santitarn Sathirathai, Credit Suisse Economist for Non-Japan Asia at the AIC.

He expects further interest-rate cuts in China, India, Indonesia and Singapore, but monetary easing in Asia would occur at the same time as investors expect a U.S. Federal Reserve rate hike.

Central banks in the region are less anxious about a repeat of the “taper tantrum”, when portfolio investors exited emerging markets in the summer of 2013, after the Fed hinted that it would reduce its asset purchases.

“In many cases real short-term interest rates are higher than the long-term average, so more central bank easing is likely to boost growth,” he said. “Trade-weighted exchange rates are also high which, if maintained, could lead to a loss of export competitiveness.”

A soft oil price will translate into lower transportation costs and food prices, but it will also benefit current account balances, especially in South Korea, Taiwan and Thailand. In this environment, many central banks would tolerate currency weakness induced by foreign portfolio outflows. 

Tight fiscal policies in Southeast Asia and India also justify more accommodative central bank behaviour. Thailand, Indonesia and India, for example, have cut subsidies in order to divert cash to infrastructure projects. The reallocation of government spending will eventually improve productivity, but in the short-term erodes consumer spending.

Bright spots in the region include a rebound in high-value tourism in Thailand; on the other hand Sathirathai fears that Indonesian GDP growth could surprise on the downside as policy makers prioritize economic stability.

The Reserve Bank of India is likely to be cautious, however, due to concerns about foreign capex divestment, according to Deepali Bhargava, Economist for Non-Japan Asia at Credit Suisse. Disinflationary pressures will also be exacerbated by the government’s commitment to fiscal consolidation.

In North Asia, the Bank of Korea will persevere with its easing stance, said Christiaan Tuntono, Credit Suisse Economist for Non-Japan Asia. It has cut interest rates six times since 2012 when GDP growth slipped below trend, and it will not be constrained by either a weaker currency or the high level of household debt if it fears the onset of deflation, he said.

Indeed, throughout Asia, central banks are on their guard against the stagnating forces of lower prices and weaker demand.