INTHEBLACK October/November 2024 - Magazine - Page 21
decisions overly dependent on the expected
path of US interest rates. While following
the Federal Reserve could limit exchange
rate volatility, the risk is that central banks
could fall behind or move ahead of the curve
and destabilise inflation expectations.”
ASIAN PERSPECTIVE
Malaysia-based economist Dr Jomo Kwame
Sundaram, research adviser to the Khazanah
Research Institute, says the responses to
inflation by East Asian countries have been
varied, especially in smaller countries that
are “terrified money would flow out because
of higher interest rates elsewhere”.
“There would be a massive exodus of
capital, which would weaken their own
exchange rates. That has happened very
badly in Malaysia, because Malaysia is
one of those countries, besides Japan, that
has not lifted interest rates since 2023,”
Jomo says.
Malaysia’s central bank, the Bank Negara
Malaysia, is expected to keep its key interest
rate on hold at 3 per cent until at least 2026.
“A number of factors have influenced the
different responses and behaviours of various
central banks, including the policy influence
of elites in Asia,” Jomo adds.
“Many elites are very, very concerned about
the exchange rates of their currencies, so
there has been a lot of domestic pressure to
keep their currencies from sliding by raising
interest rates.”
In March, Japan ended its eight-year
period of negative interest rates, raising
them from minus 0.1 per cent to positive
0.1 per cent. Negative interest rates are used
by central banks to stimulate economic
growth and counter deflation.
Rather than having to fight inflation,
Japan has been in a long-running fight
against deflation, where prices have
continued to fall despite efforts to stimulate
demand, including negative interest rates
and programs to encourage lending.
Japan imposes state controls on energy
prices, with gas and electricity regulations
dictating that price hikes can only happen
gradually. It also imposes price controls on
agricultural imports, such as wheat, where
prices are fixed for six months at a time.
It has taken higher import costs and
supply chain disruptions to move the
inflation dial in an upwards direction in
Japan. In January, Japan’s consumer price
index surged to 4 per cent, its highest level
since 1981 and double the Bank of Japan’s
2 per cent inflation target band.
Yet, instead of raising rates to combat inflation,
Japan is effectively relying on a decline in real
wages to keep levels under control.
Thailand, with one of the lowest inflation
rates, continues to control prices for a
wide range of selected goods and services,
including rice and other staple agricultural
products, building materials, liquefied gas,
medicines, certain retail goods, and services
through retail and wholesale channels.
At just 1 per cent, inflation is not the main
problem in China. Economists are cautious
about the sustainability of growth momentum
given continued pressure on the property
sector and weak consumer confidence.
As part of efforts to stimulate the economy,
the Chinese government has been issuing
long-term treasury bonds, similar to its
approaches during the 1997 Asian financial
crisis, the 2008 global financial crisis and
the 2020 onset of COVID.
“Without interest rates being set to the right level for the
underlying economic conditions, you’ve got no chance of
restoring price stability. That’s what this is all about – getting
inflation down to a level that we would regard as having low
and stable prices.”
WARREN HOGAN, JUDO BANK
Vanguard Asia-Pacific chief economist
Qian Wang says she expects a continued
normalisation of Mainland China’s
economy following the 2023 rebound from
COVID lockdowns.
“We foresee full-year core inflation around
1 per cent and full-year headline inflation of
0.8 per cent. This is well below the 3 per cent
inflation target set by the People’s Bank of
China,” she says.
“To support the economy and given low
levels of inflation, we expect the PBOC to
ease its policy rate from 2.5 per cent to
2.2 per cent in 2024 and to cut banks’ reserve
requirement ratios. However, we expect any
easing in the near-term to be marginal.”
THE RIGHT APPROACH
Independent Australian economist Warren
Hogan, Judo Bank’s chief economic adviser,
says monetary policy should be the starting
point to controlling inflation before thinking
about alternative methods.
“Without interest rates being set to the
right level for the underlying economic
conditions, you’ve got no chance of restoring
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