Asian rate hikes likely to come in below Fed expectations: Morgan Stanley   

MORGAN Stanley is estimating Asean, Korea and Taiwan’s central banks to lift policy rates by a cumulative 87.5 basis points (bps) to 225 bps this cycle, which is less than the US Federal Reserve’s expected 350 bps.

The research house foresees real rates rising to either “neutral” or “below neutral” in 2023 as it anticipates downside growth risks to outweigh the risks of upside inflation.

While inflation has mostly surprised to the upside in the United States - with the Fed delivering a 75 bps hike in the last meeting - economies under Morgan Stanley’s coverage are “unlikely to tighten in lockstep with the Fed”, said the research house in a note on Sunday (Jun 26).

This is because Asian regions under its coverage mostly still see a negative output gap as compared to the US, which has the “more severe overheating problem as it runs above potential”. The research house also highlighted how policymakers have been earlier to normalise in economies where recovery is more advanced, such as in Korea and Singapore.

Instead, Morgan Stanley believes foreign exchange (forex) depreciation would be more likely to prompt policy tightening – although the forex impact on inflation currently seems manageable, in its view. 

“Forex passthrough to inflation has decreased over the years from lower forex volatility and better anchored inflation expectations. In Indonesia, de-dollarisation also helped,” noted its research team.

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Morgan Stanley’s base-case forecast includes a 25 bps hike for each meeting this year for the central banks of Korea, Taiwan, Malaysia, the Philippines and Thailand.

The research house also expects Singapore’s central bank to further steepen its Singapore dollar nominal effective exchange rate (S$NEER) appreciation slope in the October 2022 review. Such a move would bring it in line with the appreciation pace seen in the steady-state expansion part of previous growth cycles, added the team.

Morgan Stanley sees an additional 25 bps rate hike in Q1 2023 for each of Malaysia and Thailand’s central banks – but expects no further tightening for those of Korea, China, the Philippines and Singapore.

An exception to the 25 bps hike-per-meeting policy rate profile is Bank Indonesia (BI). Morgan Stanley believes BI will hike policy rates by 50 bps in Q3 2022 before a further 75 bps in Q1 2023, which factors in the assumption of a 25 per cent retail fuel price hike.