Globally, the COVID-19 crisis has begun to ease, particularly in developed countries. As a result, their economies have substantially bounced back to pre-pandemic levels. Additionally, their labor markets have almost returned to normalcy. Concurrently, signs of increased inflationary pressures have led to important changes in global financial markets, including ASEAN, after the US Federal Reserve (Fed)’s signals that it may begin its QE tapering program towards the 2021 year-end, which would prompt it to raise the Fed Funds rate probably during 3Q22.1 Likewise, the European Central Bank (ECB) has sent signals at its latest meeting that it would cut back its bond-buying program. The Bank of Korea (BOK) was among the first central banks that began hiking its policy rate at its monetary policy committee meeting held in August 2021 after its inflation hit a 9-year high of 2.6 percent in August 2021, and household debt skyrocketed above 100 percent of the country’s GDP because of the COVID-19 pandemic. Changes in monetary policy stances of the US Fed, ECB and BOK may reflect the eminent changes in monetary policies within ASEAN soon.
We, at KResearch, are of the view that Singapore will likely be the first in the ASEAN-6 to begin tightening its monetary policy by adjusting the slope of the Singapore Dollar’s exchange rate around early 2022, after its economy has powered back at a solid pace with GDP exceeding its pre-pandemic levels, to strike a balance between offshore inflation rates and its economic growth. Meanwhile, the Philippines will likely be the next country in the ASEAN-6 to raise its policy rate amid increased inflationary pressure and downside risks that may lead to an exodus of capital from the country. Vietnam may follow suit after its economy has grown to a potential level for some time to ease an overheated economy and avoid risks of being labeled a currency manipulator. Next are Malaysia and Indonesia. Their policy rate hikes may take place at around the same time as the Fed’s because their financial markets are relatively dependent on foreign capital. By then, their economies would grow well above their pre-pandemic levels. Thailand may be last in the ASEAN-6 to undertake monetary policy normalization as it requires a longer period of accommodative monetary policy since its economy has been hit the hardest by COVID-19.
1 Survey of Primary Dealers (July 2021)