A crowded slate of export, inflation and manufacturing data from emerging Asia on Wednesday confirmed two things. First, economic recoveries are mostly intact. Second, policymakers are fast running out of excuses for not raising interest rates.
Supportive policy settings look increasingly bizarre. As Credit Suisse notes, average headline inflation in non-Japan Asia, weighted by gross domestic product, is now 4.7 per cent. Average short-term interest rates, however, are just 3.3 per cent, resulting in real interest rates of minus 1.4 per cent. That amounts to an unwarranted stimulus to consumption and investment and a come-on to speculators, encouraging them to chase assets higher. While average regional GDP growth runs at 7 or 8 per cent and output gaps are small, the conclusion is unarguable: real rates need to be higher.
The Bank of Thailand is beginning to get it. The announcement of Wednesday’s surprise 25-basis point rate rise to 2 per cent, the third since July, contained a recognition that an “extra-accommodative monetary policy stance” – a negative real rate of 1 per cent – was at odds with strong fundamentals. Others are still dallying on the exit threshold. Indonesia, for example, has kept its base rate steady since August 2009, apparently worrying more about tempting capital inflows through higher rates than about fostering inflation. It shouldn’t.