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Asia’s very complicated interest-rate pause

INTEREST-RATE pauses aren’t exactly in trouble, but things are beginning to look awkward for officials eyeing a decent break. World growth isn’t falling off a cliff and inflation has failed to ease up quite as expected in some big economies. The more fortitude the expansion shows, the greater the risk of a policy mistake. At least in 2022, the direction of policy was abundantly clear.

While the resilience of the US economy may get a lot of attention, the situation in Asia bears close scrutiny. In South Korea, Indonesia, and Malaysia, rate hikes have already been suspended. But the cuts in borrowing costs that were considered a natural sequel will take longer to materialize. The almost daily warnings from Federal Reserve policymakers that rates may need to move higher than anticipated aren’t welcome. All central banks assert they move independently from the Fed. In practice, they tend to replicate broad trends in American credit.

This year was supposed to bring respite after the rapid tightening of 2022. That’s still likely to happen, but the picture has become messier. The path to an easier monetary landscape is less comfortable than envisaged. The Reserve Bank of Australia (RBA) will probably nudge its main rate up by another quarter point on Tuesday. Doesn’t sound so bad — except there was a case to be made that the RBA ought to be done by now. In December, the bank considered no change; minutes of January’s board meeting showed no such option was on the table. Worse, the panel issued a surprisingly hawkish statement. Economists scrambled to add further hikes to their projections.

If the RBA risks overdoing it, Bank Indonesia might be asked whether it has done too little. Governor Perry Warjiyo, recently nominated for a second term, says he’s done with hikes and that price gains are projected to return to a comfortable level. He takes heart from the currency’s advance; the rupiah is up about 1.7% against the dollar this year. While modest, the appreciation is the most in Asia. Any impact from further Fed tightening on the exchange rate can be dealt with through intervention.

Monetary chiefs are generally loath to box themselves in with categorical statements. Indonesia’s pause is “credible,” wrote Mohamed Faiz Nagutha, an economist at BofA Securities, in a March 1 note. “On the other hand, we also believe rate cuts won’t come very rapid next year either.” The firm predicts Indonesia will lower rates by a full percentage point in 2024, little more than half what’s predicted to come from the Fed. On the day Indonesia walked away from tightening, the Philippines opted for another 50-basis point increase. Manila isn’t through, but it is making noises about shifting to smaller increments.

With its rebound coming along nicely, additional monetary easing in China looks like a long shot. The economy may have the opposite problem to the one it faced last year, when the expansion faltered: A recovery that’s a bit too vigorous. State media have been told to convey at this week’s National People’s Congress that leaders are satisfied and the need for stimulus is moderate for now, Bloomberg News reported, citing a person familiar with the plans. Beijing will target growth of around 5% this year, Premier Li Keqiang said on Sunday. While that’s down a bit from 2022’s goal of about 5.5%, it would be a marked improvement on last year’s actual expansion of 3%.

Why are things so skewed? First, there’s really never been such a thing as Asian monetary policy. Political systems, levels of development, and inflation dynamics vary considerably. Some monetary authorities are independent, and eager to show it. Others less so — or, in the case of China, not at all. Some central banks, such as in Korea, opened an early fight against inflation. Others were slower off the mark. Nonetheless, things do look more nuanced than they did a few months ago. The global economy doesn’t quite look poised for recession. The International Monetary Fund sounds less pessimistic, marking up its forecasts for growth a touch after having spent much of 2022 cutting projections.

Thank China’s muscular reopening — and the US, where the labor market remains hot. American consumer spending has been strong, and inflation re-accelerated in January. Fed officials are lining up to warn that rates may have to be pushed higher than anticipated. It’s unclear whether the Fed’s leadership believe a pause has been meaningfully delayed or some mere tweaks to timing are all that’s warranted. Chair Jerome Powell testifies to Congress this week. For its part, the People’s Bank of China signaled on Friday that policy will be largely stable.

Scenarios for the world economy have gone from hard landing to soft landing and perhaps no landing at all. Here’s hoping we at least get a chance to admire the view.


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