Asian Central Banks to maintain gradual rate hiking pace

September 16, 2022

Asian central banks may raise rates more than what was anticipated earlier but may follow a slower pace than their developed world peers, according to Nomura’s global market research, which expects India’s central bank to raise repo rate by 50 basis points in September against its earlier prediction of 35 basis points.

Nomura said India’s terminal repo rate in this tightening cycle may rise to 6.1% by March 2023, against its earlier terminal rate projection of 6%. The repo rate currently stands at 5.4%.

This change in prediction followed the surprise rise in retail inflation, measured by consumer price index (CPI), which has gone back to 7% in August after keeping below this level in the previous three months.

Nomura predicted more frontloaded rate hikes and higher peak terminal rates for the US Federal Reserve, European Central Bank and Bank of England.

But, it cited three reasons for Asian central banks to maintain a gradual hiking pace.

“Asia’s inflation cycle is benign relative to both the US and Europe, and there is limited evidence of a wage price spiral,” Nomura said, adding that developed market central banks that are tightening into a recession represent a growth headwind for Asia via tighter financial conditions and weaker export demand. Thirdly, Asia’s central banks have a different policy reaction function, and supporting the recovery is still a priority for many emerging market Asian central banks.