Asia Pacific’s monetary policy to diverge in 2022: Report

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South Korea and New Zealand are expected to raise interest rates next year while emerging economies keep policy loose.

Published On 8 Dec 2021

Monetary policy in the Asia Pacific region will continue to diverge next year as rich countries raise rates to battle inflation and emerging economies keep rates low, according to a new report.

South Korea and New Zealand’s central banks are likely to tighten policy due to inflation concerns in 2022 after twice hiking rates this year, according to a research briefing by Oxford Economics released on Wednesday.

The Reserve Bank of New Zealand will lift the benchmark rate by 125 basis points to 2.25 percent, with the Bank of Korea to announce two 25 basis-point hikes to bring the policy rate to 1.5 percent, Oxford Economics predicts.

The Reserve Bank of India is also expected to raise its policy rate by 25 basis points in the first quarter to 4 percent.

“The new Omicron variant has increased the risks around the monetary policy outlook. If the variant dampens demand more than it exacerbates supply-chain disruptions, it could prove disinflationary,” Sian Fenner, the lead Asia economist, said in the briefing.

“But the reverse is equally true. Thus, we see most central banks prioritising growth and not shifting policy material.”

Southeast Asian economies including Malaysia, Thailand, and the Philippines are considered unlikely to raise rates before 2023 due to gross domestic product remaining 4-6 percent below pre-pandemic levels.

‘Nascent recoveries’

Indonesia is not expected to consider a rate hike until after the US Federal Reserve raises rates, which is not expected until September 2022.

“We forecast core and headline inflation to trend higher over 2022, but we still expect inflation, on average, to remain below central banks’ medium-term inflation targets,” Fenner said. “As such, central banks have the room to prioritise supporting their nascent recoveries.”

China is considered unlikely to raise rates in 2022 after adopting accommodative policies this year to boost flagging economic growth, according to the briefing, as authorities “remain keen on containing financial risks and leverage”.

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