Aggressive DM rate hike puts Asian economies at risk of imported inflation

In comparison, central banks in Asia are expected to raise rates gradually.

Why over here

“Asia’s inflation cycle is benign relative to both the US and Europe, and there is limited evidence of a wage price spiral,” analysts at Nomura Singapore Ltd said in a September 14 report. Second, developed market central banks are headed for a recession, which represents a growth headwind for Asia through tight financial conditions and weak export demand.

Furthermore, central banks in Asia have a different policy response task, and supporting recovery is still a priority for many emerging market Asian central banks.

However, the widening gap between developed market (DM) and emerging market (EM) interest rates could turn into a threat for the latter.

A key risk for Asian central banks amid widening interest rates is currency weakness, as it could increase imported inflation risk, the Nomura report said. Note that a higher rate hike by the US Federal Reserve than expected means a further strengthening of the US dollar.

When the price level rises in a country in general due to increase in the prices of imported goods, it is called imported inflation.

For Asian economies, every 5% local currency depreciation could push retail inflation up by an average of 20 basis points, according to Nomura’s estimates. The effect seems muted, but much depends on how commodity prices move from here. Nomura said softening global commodity prices could offset the rise in inflation due to a weak currency. However, if the softening of commodity prices reverses for whatever reason, the outlook for EM currencies turns darker.

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