CENTRAL BANKS ACROSS HAVING TASK IN HAND AMID RISING INFLATION

Amid spiking inflation worldwide, central banks are winding down easy money policies. The Bank of England recently raised interest rates for the third time in a row, while the US Federal Reserve in March carried out the first of six planned rate hikes for this year. Even the emerging market central banks in Brazil, Mexico, South Africa, Chile, Russia, to name a few, have started increasing rates, keeping price stability as their priority.

Some Asian central banks are shaking off their long-held reluctance to follow their global peers in lifting benchmark interest rates off historic lows, as the Ukraine war blows consumer prices well out of policymakers' comfort zones. The region's economies have largely lagged U.S. and European reopenings from the pandemic and central banks in Australia, India and Southeast Asia have up until now mostly looked past the inflation pressures caused by global supply snags, and focused more on shoring up their recoveries. This week, however, there has been a marked shift in the language of some of the region's less hawkish central banks on worries the renewed surge in commodity costs caused by Russia's invasion of Ukraine could destabilize their economies.

The Reserve Bank of India (RBI) stands apart as a rare example of a central bank today that has shunned interest rate hikes in the post-pandemic era and remained open to rate cuts, despite rising inflation. As the RBI’s monetary policy committee (MPC) meets from April 6-8 to decide its latest interest rate policy, the RBI has so far kept interest rates low by exploiting what the Ministry of Finance treats as a built-in “escape clause” in the monetary policy, which permits inflation to rise above the mandated target of 4 percent. In the process, the federal government has been able to borrow much-needed funds from the markets at lower costs since the RBI is also tasked with managing the sovereign debt.

Australia's central bank on Tuesday dropped a previous pledge to be "patient" in its assessment of current conditions, taken widely as a signal that the door was now open to the first interest rate increase in more than a decade. Reserve Bank of Australia (RBA) Deputy Governor Michele Bullock said on Wednesday the change in the policy outlook reflected growing evidence of inflation pressures. "It seems external inflation dynamics have become enough for the RBA to pre-emptively flag a shift," said Ben Jarman, an economist at JPMorgan. "The RBA guidance suggests upcoming consumer price index and labour cost data are likely to clinch the case for normalization," he said, projecting the first rate hike to come in June from the previous forecast for November.

Setting the global pace, the U.S. Federal Reserve raised rates for the first time since 2018 last month and looks on track for an aggressive tightening cycle to fight surging inflation. In the Philippines, central bank governor Benjamin Diokno said on Tuesday he was ready to take "pre-emptive action" if "inflation expectations" risked becoming "disanchored. "His comments contrast with more passive remarks in March about being "ready to respond" and follow data that showed consumer inflation nudging the upper end of the central bank's projected range. Analysts currently expect the bank to raise its benchmark interest rate in the second half of this year.

Taiwan's central bank last month surprised markets by raising rates, and some economists expect more hikes to come this year. "The big picture is that inflation is becoming more challenging for the region's central banks, after being a non-issue in recent years," said Krystal Tan, an economist at ANZ. "On balance, the odds of policy rate adjustments being brought forward are rising."

Some Asian economies, such as South Korea, Singapore and New Zealand, already commenced their shifts away from pandemic era monetary stimulus last year as surging prices unsettled policymakers. At the other extreme, Asia's two largest economies are a long way from tightening monetary policy, with the Chinese and Japanese central banks both in no rush to withdraw stimulus as they focus on underpinning growth. Ironically, some of the world's most circumspect central bankers have been in emerging Asian markets - historically seen as the most vulnerable to Fed rate hikes and inflationary shocks. In Southeast Asia, government subsidies and price controls have eased pressure on central banks by containing inflationary pressure. As such, Thailand, Indonesia and Malaysia remain publicly dogged in their commitment to low rates and talking down domestic prices pressures, but also acknowledge the emerging and persistent threats from global inflation. Bank Negara Malaysia's governor said last week she recognized that the unprecedented conditions that heralded monetary support during the pandemic were almost over.