Saturday August 18, 2012
Monetary policy, growth and inflation
WITHOUT a doubt, monetary policy for the remainder of the year will weigh more on growth than on inflation. This was also emphasised by Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz at a media briefing on Wednesday when the second quarter’s GDP was released.
On the same day, the Statistics Department released data showing that July’s prices as measured by the consumer price index gained 1.4% year-on-year to 104.8 and remained unchanged compared to the previous month.
Hongkong and Shanghai Banking Corp Ltd Asean economist Lim Su Sian expects further monetary easing from Vietnam but expect Indonesia, Malaysia, the Philippines and Thailand to remain on hold for the rest of the year. She says the Monetary Authority of Singapore will maintain its tightening bias.
“On the face of it, there appears to be significant room for some of these central banks to cut rates or ease further. In particular policy rates in Malaysia and Thailand don’t look quite as “low” as in some neighbouring countries, because central banks there were very pro-active in normalising interest rates upwards amid the post-global financial crisis recovery,” she says.
However, Lim says the actual scope for rate cuts is limited. Although inflation appears generally well-contained now, policy makers in many parts of the region are still concerned about upside inflationary risks and rising debt levels.
“Credit growth continues to be rapid in many Asean countries due to a combination of strong credit demand and low interest rates, and asset markets like housing are still looking bubbly. These risks are only likely to worsen it the coming months, with policy makers in the US and Europe possibly unleashing further monetary stimulus,” she adds.
Lim says this means that for the remainder of the year policymakers are more likely to rely on fiscal policy with a combination of higher government spending and regulatory reform.
Citigroup Inc’s Asia Pacific chief economist Johanna Chua says central banks in the region will need to be cautious about how far they are willing to pursue monetary easing because while inflation remains generally benign at this juncture, risks from a recent rise in commodity prices could also impact inflation expectations especially in countries where domestic demand has been particularly strong.
“We’re expecting Vietnam, the Philippines and Thailand to cut rates further,” she says, adding that others such as Indonesia will need to plan on when they should start normalising policy rates amid rising external imbalances.
OSK DMG economist Leslie Tang says in a report dated Aug 15 that there will not be any hikes in Malaysia’s benchmark policy rate this year as a result of more moderate inflation amid global headwinds.
He says inflationary pressures are likely to be mitigated by weaker commodity prices and continued government subsidies despite some demand-pull and cost-push inflation arising from massive government spending and the impact of the minimum wage policy. — By Fintan Ng