Asia (ex Japan): Our calls at a glance

People's Bank of China

Our call: Policy rate cuts put on hold, though the central bank will continue urging banks to cut the 5Y Loan Prime Rate by 10bp in July, before pausing for the rest of the year.

Rationale: Quarantine rules for positive Covid cases have been relaxed, and it's expected that the government has changed its focus from Covid control to balancing Covid control and economic growth. The number of Covid cases has remained in the single digits for weeks. We should see a mild consumption recovery in the June data and a faster recovery in July. The summer holiday spending should be similar to 2021.

Risk to our call: Covid cases could rise and the government could react by tightening quarantine rules again. This would likely trigger rate cuts.

Iris Pang

Reserve Bank of India

Our call: A further 50bp hike at each of the August and September meetings. No hike at the December meeting. The repo rate ending the year at 5.9%.  

Rationale: The RBI needs policy to exit accommodation and move to at least neutral in short order. We believe that repo rates will catch up with core inflation at about 6% towards the end of the year (so basically zero real rates), and that could provide cover for the RBI to halt the withdrawal of its accommodation.

Risk to our call: The most likely source of error is inflation being higher than forecast, requiring the RBI to keep its tightening bias through to the year-end, and the repo rate ending at over 6%.

Rob Carnell

Bank of Korea

Our call: Rate hike in July, August, October and November then entering an easing cycle from 4Q23.

Rationale: We expect CPI to stay above 6% in 3Q22, while GDP growth is likely to slow only modestly and remain relatively healthy on the back of reopenings and supportive fiscal policy. We expect the BoK to set its terminal rate at 2.75% by the end of 2022, but markets expect it to be 3.00-3.25%, reaching there by 1H23.

Risk to our call: If financial markets do not stabilise with inflation exceeding 6% in June, the BoK may take a big step in July and reach 3.00% by the year-end. But more and faster rate hikes will move forward the next rate cut to 3Q23.

Min Joo Kang

Bank Indonesia

Our call: A string of 25bp rate hikes in August, September and October. The 7-day reverse repo rate at 4.25% by the end of the year.

Rationale: BI has some space to delay rate hikes in the near term as core inflation remains relatively well-behaved (2.7%). The pressure on the Indonesian rupiah has stepped up in recent weeks, but the partial resumption of palm oil exports should translate to a renewed widening of the trade surplus, which should be supportive of the currency. BI may also go easy on rate hikes (75bp total for the year) after it announced a programmed increase in reserve requirements from March through to September, which should bring the RR from 6% to 9%.

Risk to our call: BI indicated that its pain point for rate hikes would be the acceleration of core inflation. We could see a more aggressive hiking cycle should core inflation see a more pronounced pickup with BI taking the 7-day reverse repo rate to 4.75% for the year.

Nicholas Mapa

Bangko Sentral ng Pilipinas

Our call: A series of 25bp rate hikes in August, September, November and December. BSP’s overnight reverse repo at 3.5% by end-2022.

Rationale: Inflation is expected to average 5.6% in the second half of the year, all but ensuring that BSP breaches the 2-4% inflation target for 2022. BSP has indicated it is open to doing “all it takes” to get inflation down, but at the same time officials have shown a preference for gradual and measured adjustments to policy.

Risk to our call: Inflation accelerating past current BSP forecasts may trigger front-loaded aggressive rate hikes to rein in inflation expectations and limit the spread of second-round effects. Inflation breaching 7% could trigger 50bp rate hikes in August and September, followed by 25bp each in November and December. A BSP overnight repo rate at 4.0% for the year in this scenario.

Nicholas Mapa