The View from Asia

Interest rate hikes, currency swings, inflation - what bearing will it have on economies?

Asia News Network writers review the state of their economies. Here are excerpts.

A teller at a money changer in Jakarta on Aug 26, 2015. PHOTO: REUTERS

Dealing with extreme fall in yen's value


The Yomiuri Shimbun, Japan

The government and the Bank of Japan have intervened in the currency market to buy yen and sell dollars for the first time in 24 years in order to put the brakes on the yen's sharp decline.

As a result of the intervention, the yen's value on the foreign exchange market, which once weakened to nearly ¥146 to the dollar on Sept 22, temporarily strengthened to the ¥140 range. Excessive market fluctuations have a major negative impact on the economy, such as making it harder for companies to make business plans.

However, the central bank has continued to ease monetary policy, saying that Japan's economic recovery has been slow. If the government and the central bank are perceived as incapable of dealing with sharp currency fluctuations, it could accelerate speculative moves. Intervention can be expected to counter such moves. But it remains to be seen how long the effect will last.

Monetary policy differences between Japan and the United States are expected to remain unchanged for the present. Other central banks, including the European Central Bank, are also raising interest rates across the board.

The situation remains the same, in that only the Bank of Japan has been left behind and the yen is prone to be sold off. A weaker yen pushes up domestic prices through higher import costs. Measures are also needed to alleviate the pain of soaring prices. The sharp rise in prices of daily necessities such as energy and food has hit low-income earners hard. The government said it will provide ¥50,000 to each household that is not subject to residential tax, but some observers have noted that the recipients of the benefits will disproportionately be elderly people.

The government intends to formulate a comprehensive economic package in October. Measures against high prices should be considered so that support will reach those who really need assistance, including the child-rearing generation and non-regular workers.

RM meltdown: preparing for the worst

Dr Rais Hussin

Sin Chew Daily, Malaysia

While the Malaysian finance minister is busy recording TikToks to convince the public that the country's economy is on solid footing, Ringgit Malaysia (RM) continues to descend by breaking all technical levels to watch, invariably putting Malaysia's foreign debts in foreign denominations in a very precarious situation.

In addition, given that Malaysia has very high net food imports, the food costs for many in Malaysia are expected to rise and run amok. Malaysia's unbridled politicking is not helping the ringgit situation either, on the contrary, opening it fundamentally to the levels never seen in Malaysia's history for more than 24 years.

Malaysia's foreign currency reserves also fell precipitously below the psychological US$100 billion mark after the announcement by Federal Reserve on the rise of US interest rates. Having foreign reserves this low (and potentially sliding lower) is very critical for a country that highly depends on food imports.

It might sound unthinkable that in a situation of a fragile economy, just beginning to recover after the Covid-19 pandemic and facing severe challenges due to international supply chain disruptions authorities, could introduce an interest rate hike. Nevertheless, Malaysia has seen three consecutive interest rate hikes from May to September 2022. After all, the interest rate hike is also believed to ward off currency depreciation.

However, given the specifics of the current global and local situation, interest rate hikes can do very little in helping to fight either inflation or ringgit depreciation. The inflation, much of which stems from energy and other supply shocks, would not be resolved by tightening the money supply.

Nevertheless, the Minister of Finance, Tengku Zafrul Aziz, hastens to assure the public that there is no economic crisis in sight. The finance minister has further emphasized that exporters will be happy about ringgit depreciation in a book-like statement, probably, without having a clear representation of how exactly this would happen.

If this is about weakening ringgit stimulating demand for Malaysia's exports, then we must also understand what will take to expand the production capacity to fulfill that growing demand. Malaysia has been experiencing a severe shortage of highly technically skilled individuals across the industries.

As for credit availability, locally, Bank Negara Malaysia has hiked the interest rate by 75 basis points since May 2022, discouraging business expansion. In the end, although the Finance Minister and other avid "proponents" of ringgit depreciation accuse their opponents of looking at only "one side of the coin," they themselves appear to suffer from myopia, cherry-picking and making broad book-like brush-stroke statements while leaving numerous parameters out of the equation.

The only credible way to simultaneously fight inflation and currency depreciation is to develop a larger domestic market with less and less reliance on both imports and a seemingly supportive commodity-exporter position.

    Fiscal monetary synergy


    The Jakarta Post, Indonesia

    The 50-basis-point interest rate hike announced recently by Bank Indonesia (BI), which brings the policy rate to 4.25 percent, is a rational measure to fight inflation, defend the rupiah and curb capital outflows from rupiah-denominated assets after the United States Federal Reserve fired off another 75-basis-point rate hike, its third in a row, to a range of 3-3.25 percent.

    This monetary tightening will raise borrowing costs but will not be so disruptive as to cause a sudden shock to domestic demand, which has been the main driver of post-pandemic economic growth, given the huge amount of fiscal support already provided by the government to cushion the inflationary impact of the recent energy price rise. BI's policy rate increase is necessary to keep inflation expectations anchored amid global economic uncertainty.

    Indeed, as the pressures are now both external and domestic, fiscal and monetary policies - and their interactions - are factors that markets are watching to divine the future of Indonesia's domestic-demand-led economy. As a net exporter of commodities, the country is in a stronger position to avoid recession than net importers. It has maintained positive terms of trade that provide liquidity to fund domestic consumption and fiscal resources for policymakers to cushion the growth cycle.

    Indonesia's improving current account balance also provides banks with more room to lend. The enormous fiscal measures have thus far been effective at controlling inflation. However, the challenge ahead is that the era of low-cost funds has demonstrably ended, especially after the Fed signaled on Wednesday that it would continue to hike its rate from the prevailing range of 3-3.25 per cent to a "terminal rate" of 4.6 per cent in 2023 to bring inflation down to 2 per cent.

    Another risk to the economy is that we can no longer expect windfall profits from commodities markets, as the boom appears set to end amid escalating concerns over economic recession and even stagflation in some advanced economies. This means the fiscal authority will no longer be able to provide a strong buffer against the inflationary impact of volatile food and energy prices.

    As core inflation has exceeded BI's inflation target range of 2-4 per cent since June and headline inflation is expected to surpass 6 per cent year-on-year by the end of the year, most analysts predict BI will continue to increase its policy rate to 4.5 per cent by the end of the year and eventually to 5 per cent in 2023.

    Importantly, BI has firmly signaled it will continue to tie its policy rate to the core inflation outlook, meaning its policy would not significantly be influenced by volatile food and energy prices.

      In difficult times

      Jose Ma. Montelibano

      Philippine Daily Inquirer, The Philippines

      One of the earliest reports from the new finance team of this administration mentioned that the Philippines will be borrowing more than one trillion pesos in 2023. I suspect during the earlier part of the year or within the first 365 days of the new president. How depressing.

      The last president more than doubled the running total of government debt, starting with 6 trillion pesos and ending with 13 trillion pesos. He is not president anymore but we, all the way to our grandchildren, are left behind to pay for the next several decades.

      In 2016, PNoy turned over a government with solid finances and an exchange rate of 46 pesos to 1 US$. Now, it is 58 pesos to 1 US$, or depreciation of 26 per cent. This delicate scenario brings back to mind how an older Marcos from 1970 - 1985 collapsed the peso value several times. He started with 3.9 pesos to 1US$ and left the exchange rate of a whopping 18 pesos to 1 US$, almost one-fifth of its original value.

      Whether we like the new president or not, we share the same Philippines. But, of course, we will not share the same economic challenges. He will be okay no matter what; he and his brood will not go hungry no matter what.

      But the millions going hungry today will increase in number. Politics will force the new administration to borrow no matter how weak our financial position.

      What is funny is that we are only in the third month of this presidency. Inflation is not choosy, it will just raise any and all costs of goods and services that it can manage to do.

      We can do little with the difficult times because many of them are caused by factors beyond our control. However, we can do much by making the best of a bad situation. The answer, as many say, is in our hands.

      • The View From Asia is a compilation of articles from The Straits Times' media partner Asia News Network, a grouping of 22 news media titles.

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