Asian monetary policy: Policy rates have troughed

Highlights from the CAA Weekly Table:

  • Political risks: China is testing Biden. Its intrusions into the air space and waters of Japan, Taiwan and the Philippines are designed to show up the US as a toothless tiger, unable to defend its allies. But China may have miscalculated and the result is higher risk of tensions.
  • Asian economies: Asian growth could see significant upside. Recent data show global demand for Asian exports firming. Massive investments by tech firms validate the view that tech demand will be powerfully boost Asian growth. In China, export demand will offset domestic weakness. New infection surges are hurting India and the Philippines. Thailand remains sickly. Robust exports and a likely upturn in investment will drive South Korea’s out-performance this year.

Asian monetary policy: Policy rates have troughed

  • The results of our updated Taylor Rule model for assessing the monetary policy outlook are presented below:
Policy Rate (%)

Conventional policy

Unconventional policy

China 2020: 2.16%
    • No change to key policy rates, the Loan Prime Rate (LPR) and the 7-day repo rate at this juncture.
    • Continued use of non-interest rate tools such as window guidance to spur lending to small firms.
2021e: 2.55%
India 2020: 4.00%
    • RBI to raise rates at end-2021 if recovery pans out
    • RBI not inclined toward unconventional Policy
2021e: 4.35%
Indonesia 2020: 3.75%
    • Rate hike likely in 2Q21 if downward pressure on Rupiah intensifies
    • Only macroprudential easing still on the table
    • BI still a standby buyer of G-sec in 2021, but policy continuity in 2022 unlikely
    • Mooted changes to BI’s mandate bear watching
2021e: 3.75%

2020: 0.5%

    • Policy rate on hold until 2023; tourism accounts for most of the remaining gap between output and its pre-COVID trend, but a recovery is pushed out to 2022.
    • BOT more likely to use yield curve control and/or forward guidance should downside risks materialise.

2021e: 0.5%

Singapore 2020: –
    • Policy normalisation only from Apr 22 on account of a closing output gap and firming core inflation.
    • MAS is unlikely to enact unconventional policy.
2021e: –
Malaysia 2020: 1.75%
    • Policy rates have hit bottom, unlikely to budge anytime soon in either direction.
    • BNM is wary of unintended side-effects of un-conventional policy
2021e: 1.75%
The Philippines 2020: 2.0%
    • Expect monetary normalisation around early-2023 with the economic recovery in abeyance
    • Uncontroversial nature of deficit financing vis-à-vis debt monetisation means the govt likely to call upon the BSP in future crises.
2021e: 2.0%

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