Unlike my colleague James Smith’s developed market Top Trumps, our analysis of Asian central banks lacks many of the metrics he uses. For instance, we don’t have reliable measures of the unemployment rate or comparable mortgage yields. What we do have are local concerns about currency strength and stability. In short, our central bank barometer will look different to his.
Our principal benchmark for Asian regional central banks is where policy rates are relative to inflation. Call this the “real policy rate”. In simple terms, it says whether policy rates are restrictive (much higher than inflation), neutral (about the same) or accommodative (lower than inflation).
In the wake of the Covid-19 pandemic, soaring inflation rates initially kept most policy rates from reaching restrictive levels. As inflation has receded, much like the ebbing tide, many of these rates have now shifted to the restrictive side of neutral. Central banks with the highest rates are likely to make the most significant adjustments. For instance, the Philippines has already begun cutting rates ahead of the US Federal Reserve.
We’d also highlight India’s Reserve Bank, where 6.5% policy rates and an inflation rate below 4% call for imminent rate cuts. We expect to see that soon. Indonesia has a policy rate of 6.25% and is therefore in a very similar position, with well-contained inflation making for a very high real policy rate. China too looks as if it needs to ease more on this basis, in line with our house forecasts.
At the other end of the spectrum, Japan’s policy rates remain well down on inflation, so as we have noted before, we expect the Bank of Japan’s (BoJ’s) policy normalisation to continue, and further hikes from the Bank of Japan, perhaps as soon as October.
