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Tuesday, 07 February 2023
Asia’s reluctant central bank hawks off the sidelines – Surging prices are pushing Asian stocks higher

Asia’s reluctant central bank hawks off the sidelines – Surging prices are pushing Asian stocks higher

2022-10-31

 

Central banks have long been known for their cautiousness, often sitting on the sidelines as the global economy booms and the debt markets crackles. The policies they implement are also typically targeted at keeping inflation in check, rather than trying to bolster an economy. China’s recent hawkish monetary policy has been a case in point. However, the recent rise in the value of the Chinese yuan and the resultant surge in the world’s stocks has made many more traditional central bankers jittery. Asia’s reluctant hawks are back. As the world’s second-largest economy continues to grow more rapidly, Asian central banks have been left to struggle with a subdued inflation rate. What’s more, with the value of the dollar having risen against many other currencies, the expected ‘inflation-inflating’ effect of higher commodity prices has been subdued.

Emerging market central bankers are sticking to their guns – Surging prices

In rising prices, many emerging market central banks are finding themselves in a state of relative equilibrium. While they want to keep inflation down, they also want to keep inflation-adjusted prices at a reasonable level. In this context, few are more vocal than those of the BRICS countries. Brazilian inflation is 2.6%, Indian inflation is 2.9%, South African inflation is 3.2% and Russian inflation is 3.4%.

Fed hawks look to mop up any excess inflation

For all its talk of hiking rates in 2015, the Federal Reserve fell back on the inflation-fightingVariations on a theme from its 20-year history. The Fed raised interest rates three times between 2014 and 2016, but only after a prolonged period of near-stasis. While the Fed’s policymakers have clearly changed their minds about the inflation threat, the broader economy has stubbornly stayed on the path to overheating.

Are Asian central banks too cautious?

The positive inflation momentum in Asia has been accompanied by a surge in Asian stocks. While this has been a good thing in the context of an overall upturn in the equity market, it has also led to concerns that Asian central banks are too slow to react to the inflationary pressures building in their own borders. With a few notable exceptions – notably China – Asian central banks have been unwilling or unable to liberalise their exchange rates. As a result, the price of some basic commodities has skyrocketed, pushing up inflation in Asia.

The dollar’s resurgence

 
 

For all their talk of hiking rates in 2015, the Federal Reserve fell back on the inflation-fightingVariations on a theme from its 20-year history. The Fed raised interest rates three times between 2014 and 2016, but only after a prolonged period of near-stasis. While the Fed’s policymakers have clearly changed their minds about the inflation threat, the broader economy has stubbornly stayed on the path to overheating.

Indonesia hawks off

For all its talk of hiking rates in 2015, the Federal Reserve fell back on the inflation-fightingVariations on a theme from its 20-year history. The Fed raised interest rates three times between 2014 and 2016, but only after a prolonged period of near-stasis. While the Fed’s policymakers have clearly changed their minds about the inflation threat, the broader economy has stubbornly stayed on the path to overheating.

Surging prices show the world is overheating

The recent surge in the value of the Chinese yuan and the resultant surge in the world’s stocks has made many more traditional central bankers jittery. Asia’s reluctant hawks are back. As the world’s second-largest economy continues to grow more rapidly, Asian central banks have been left to struggle with a subdued inflation rate. What’s more, with the value of the dollar having risen against many other currencies, the expected ‘inflation-inflating’ effect of higher commodity prices has been muted.

Conclusion

The rise in global stock markets has been accompanied by a rise in inflation. Traditionally, central banks have responded to this by tightening monetary policy in an attempt to bring the inflation rate down. However, with inflation rising in Asia, the need to take a hawkish position at the central bank has increased. It’s up to the Asian central banks to pick up the pace of monetary liberalisation if they want to avoid seeing inflation outpace the rate of growth of the economy.

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