Asian central banks in no hurry to raise rates, says Capital Economics

Inflation in most regions of Asia “remains low” in 2022 and is likely to fall back over the coming months, according to Capital Economics.

The United Kingdom-based consultancy said in its latest update on Asia that such a trajectory supports their view that policymakers in the continent—except for South Asia, especially Pakistan and Sri Lanka—“will be in little hurry to raise interest rates.”

Putting risk on this forecast is that Omicron, or any new variant of the COVID-19 virus, might cause widespread closure of factories and ports, which leads to further disruption to global supply chains.

“The recent jump in shipping costs in Southeast Asia is another concern,” said Gareth Leather, senior Asia economist at Capital Economics.

“However, the smaller share of household consumption accounted for by imported goods means the pass-through from higher shipping costs to consumer prices will be smaller in Asia than in other parts of the world,” Leather said.

‘Reopening’ inflation

Still another risk that Capital Economics saw was from the “so-called ‘reopening inflation,” which was a key factor that drove up inflation in many emerging markets in mid-2021.

But the company noted that inflation in the cultural, hospitality and recreational sectors has barely risen and remains much lower in Asia than elsewhere in the world.

“With inflation likely to remain subdued, Asian central banks outside of South Asia will be in little hurry to tighten,” Leather said. “Our forecast is that most will leave rates on hold this year to support demand.”

In an earlier commentary, Capital Economics said the impact of Omicron on the Philippine economy might be mild considering that manufacturing activities have so far declined less than during previous waves of infection of the new coronavirus.

Also, citing the latest Manufacturing PMI (Purchasing Managers’ Index) report on the Philippines from IHS Markit, Capital Economics said the country eased down “only slightly” to 50 in January.

Data from the Philippine Statistics Authority show that as of November 2021, the value of production index for manufacturing improved with an annual growth rate of 26.5 percent from 25.9 percent in October. The November growth rate was also a turnaround from a decline of 25.4 percent seen in the same month of 2020.

At the same time, the volume of production index grew faster at 25.3 percent in November from 25.2 percent in December. It also meant a recovery from a decrease of 21.8 percent in the same month of 2020.