Posted on 09/25/2022 8:47:05 AM PDT by EBH
Markets across Asia were left reeling after the US Federal Reserve on Tuesday (Sept 20) announced another sharp 75 basis point increase to its key rate, further fuelling the rise of the US dollar against regional currencies as the world’s largest economy tries to rein in runaway inflation – even at the risk of triggering a recession.
The Fed projected that to achieve its goal of bringing inflation down to 2 per cent, it would have to continue to aggressively raise its rate to the 4.25-4.5 per cent range – up from the current 3-3.25 per cent band – by the end of this year, with a more gradual increase to 4.50-4.75 per cent in 2023.
This was the Fed’s clearest signal yet to markets, with greater pressure expected on regional currencies and economies that were already grappling with geopolitical anxiety and supply-chain disruptions caused by war in Ukraine and China’s zero-Covid induced slowdown.
Asian currencies have broadly tanked against the US dollar for most of this year, with some – like the Malaysian ringgit – falling to levels not seen since the Asian financial crisis of the late 1990s.
The situation has stoked concerns of sustained inflationary pressure as regional economies look to get back on a growth trajectory after being hit by the twin health and economic crises of the Covid-19 pandemic.
Among the worst-hit currencies is the Korean won, which on Thursday fell to its weakest level in 13 years in response to the Fed’s latest policy move – adding to downward pressure from South Korea ’s narrowing balance of trade caused by slower demand for its electronics exports.
Earlier this week, the Organisation for Economic Cooperation and Development revised its 2022 inflation forecast for South Korea to 5.2 per cent, up from its initial forecast in June of 4.8 per cent, on higher energy prices.
South Korea’s inflationary woes are best illustrated by kimchi, the ubiquitous condiment found in every household and used either as a side dish or a key component of dishes served in homes and restaurants across the nation.
A “kimchi crisis”, sparked by unfavourable weather, has been fermenting this summer, causing prices to go up to 50,000 won (US$35.50) for a 4kg pack, nearly double the regular rate.
The Bank of Korea’s decision to raise its key interest rate to keep track with the Fed has also dug into incomes, as higher rates of interest on loan repayments means less money available to households and small businesses for savings and discretionary spending.
To survive, many people have taken on extra jobs.
The number of people holding multiple jobs hit a record high of 629,610 in May this year, according to data from Statistics Korea, up by 65 per cent from January 2020 before the pandemic hit.
“It’s scary to go to a market as prices of food are all rising,” said Kim Jung-sook, who has to work as a part-time housekeeper for her brother to add to the modest income her husband earns as a delivery truck driver in capital city Seoul.
Asia behind the tightening curve While the Fed’s aggressive rate increases have had a definite effect on Asian economies and their currencies, some are faring better than others.
Joining the won at the bottom of the pile are the Thai baht and Philippine peso.
The baht, which is arguably the worst performer among its Southeast Asian peers, has taken a beating from a slower-than-expected rebound in tourism and high global oil prices that are being propped up by concerns that an escalation in the Ukraine war could cause further supply disruptions.
Adding to the uncertainty is the decision in August by Thailand ’s Constitutional Court to suspend Prime Minister Prayuth Chan-ocha as a dispute rages about whether he had completed his constitutionally-mandated eight-year term limit, sparking calls among some Thais for an early election.
“The Bank of Thailand is in no rush to hike rates because the economy is recovering slowly, and domestic politics is a bit of an added headwind,” said Ashish Agrawal, an FX and emerging markets strategist with Barclays Research.
“What that means is the government is not going to be able to follow pro-growth policies, which means locals will want to hold more dollars while foreigners delay buying local assets.”
This does not mean that the central banks of Southeast Asia’s bigger economies have stayed idle. All major central banks in the region have tightened their policies in response to the Fed’s moves, albeit at a more gradual pace as they looked to mitigate inflationary pressure while setting a path of normalisation after a period of policy loosening to soften the blow from Covid-19.
Banko Sentral ng Pilipinas, the Philippines ’ central bank, has raised its policy rate by 225 basis points since May as it tries to manage imported inflation and stem the fall of the peso, which has sunk by more than 11 per cent against the dollar so far this year.
But Southeast Asia’s central banks have been a little too slow to tighten, and may end up having to reverse their positions should there be a significant slowdown in US and global growth next year as expected, said Fung Siu, principal economist with the Economist Intelligence Unit.
“At what point do they think the inflation battle has been won? Because with monetary policy, it takes effect six months later,” Fung told This Week In Asia.
Should the prediction of a global slowdown come to pass next year, it will lead to weaker private consumption, Fung said. To bolster domestic spending, central banks would typically need to loosen policy, even if it may drag down the currency.
“Next year, we do not see any currencies strengthening against the US dollar,” she said.
Inflation becomes a stark reality Some experts say a silver lining from local currency weakness against the dollar would help bolster revenue from exports.
But the trickle-down effects are not apparent to many Sri Lankans, who have seen petrol prices go up by nearly fourfold in less than a year.
The price of 92 octane grade petrol in Sri Lanka surged to 540 rupees (US$1.48) a litre in August compared to 147 rupees in November last year.
Although Sri Lanka no longer participates in international capital markets due to its debt default in May and an ongoing debt restructuring process with the International Monetary Fund , a stronger dollar will inevitably lead to a weaker rupee and more costly imports, according to economist and Centre for a Smart Future founder Anushka Wijesinha.
“...sharp 75 basis point increase to its key rate...”
Is 75 a typo? That’s a LOT.
A basis point is one-hundredth of one percent.
Thanks; I was just about to look that up.
not really...not even a full percent increase.
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