ASIAN countries are generally seen as less aggressive in raising interest rates compared with the West, largely because of the lower inflation rates in this part of the world.
While it may be argued that raising interest rates does not necessarily keep inflation in total check, it remains one of the main financial tools central banks the world over use to manage excessive hikes in prices.
Put simplistically, when a central bank raises interest rates, things become more expensive, and people will spend less, hence keeping price increases down.
OCBC economist Wellian Wiranto says the perceived divergence between the US Federal Reserve’s rate trajectory and that of Asian economies can be attributed to several factors.
“Chiefly, it has to do with the fact that even as Asia faces an uptick in inflation prints, it is by no means the same degree as what is being faced by the United States and other major economies,” he tells StarBizWeek.
Malaysia’s inflation has risen to be sure, but it is still below 5% on a year-on-year basis, compared with over 8% in the United States, he adds.
“Hence, the level of interest rates does not need to be as elevated to combat the inflation uptick.”
Similarly, Sunway University economics professor Yeah Kim Leng says most Asian countries are facing rising, albeit “still moderate” inflation compared with high single to double-digit increases for advanced economies, hit by the global inflation shock.
“Consequently, Asian countries have been less aggressive in raising rates to combat inflation.
“The supply chain disruptions that have caused prices to escalate especially for fuel, food and household durables have been less severe in Asia compared with the European and US economies,” he adds.
Centre for Market Education chief executive officer Carmelo Ferlito says despite being at historical low levels, interest rates in Asia have never reached the near-zero levels they reached in the West; therefore, the required adjustment is also of less intensity.
“And inflation is higher in the West than here.
“This, in turn, is mainly due to two reasons; firstly, the process of money creation aided by expansive fiscal and monetary policies during the Great Lockdown has been more aggressive in the West than here, and now they are paying the high cost of those policies,” Ferlito says.
Secondly, according to him, part of inflation in Asia is “hidden” by subsidies and price ceilings.
He feels that both the West and Asia will remain on the current path, which is strong interest rate hikes in the West and more moderate hikes in this part of the region.
While this is necessary, it is not enough.
“First of all, there is a temporal lag between the moment in which monetary policy changes happen and the moment in which they manifest their effects; this temporal lag makes it difficult for any monetary policy to be effective.
“Secondly, overnight policy rate (OPR) hikes are simply not enough to fight inflation,” Ferlito says.
Once inflation has been fuelled by expansive policies financed by the printing of money or by the monetisation of debt, it is necessary to eventually terminate the increase in the quantity of money, resulting in issues, he says.
He warns that while stopping the growth of money, an impending deflation should also be prevented, and such an intention should be announced in order to avoid a recession degenerating into a depression.
“The primary aim should be the stability of the value of money which means bringing about a reduction in the rate of monetary growth, but this always involves the problem of political will,” Ferlito adds.
Panacea or not
OCBC’s Wiranto agrees, saying that there is the obvious question as to whether rate increases are the “panacea” to battling inflation, especially when some of the price pressures are supply-driven rather than demand-led.
“Still, given the magnitude of price pressures, central banks are left with little choice but to fight inflation using the few tools that they have at hand, including policy rates,” he adds.
Sunway’s Yeah says raising interest rates helps to cool rising inflation expectations and moderates demand so that strong demand does not exacerbate price increases caused by cost-push factors such as temporary production shortages and supply chain disruptions. Ensuring adequate production and minimising supply bottlenecks as well as fostering efficiency, productivity increases and competitive markets, are complementary strategies needed to secure a low-inflation environment, he adds.
Moving on, Yeah says the pre-pandemic low interest rates in industrialised economies will have to be raised to their neutral levels that would be closer to interest rates in Asian economies.
“The narrowing interest rate differentials will result in short-term capital outflows from emerging markets.
“Asian economies will have to brace for tighter monetary and financial conditions as foreign capital exit,” Yeah adds.
“However, their interest rates may not need to be raised too strongly as to derail economic growth as long as there is sufficient domestic liquidity to support the economy.”
CME’s Ferlito also commented on the area of government spending.
“Elected politicians, who must be responsive to their constituents, need something by way of a rule that will allow them to forestall the persistent demands for an increased flow of public spending.
“Such a rule needs to be simple and straightforward, it must offer clear criteria for adherence and for violation, and it must reflect and express the values held by the community of citizens.”