SINGAPORE - The European Central Bank's (ECB) announcement of plans to end asset purchases and raise interest rates sent Asia markets skidding, extending a global sell-off.
Most major indices in Asia saw red in morning trading.
The benchmark Straits Times Index (STI) fell 0.9 per cent, or 27.89 points, to close at 3,181.73 on Friday (June 10) as banks and other benchmark stocks were sold down.
Japan’s Nikkei index tumbled 1.5 per cent, while Hong Kong’s Hang Seng Index slipped 0.3 per cent. Australia’s S&P/ASX 200 dropped 1.3 per cent and South Korea’s Kospi lost 1.1 per cent.
Data showing Chinese producer price inflation eased last month to its lowest level in 14 months helped the Shanghai Composite Index buck the regional trend as it rose 1.4 per cent.
But unease remained on news that Shanghai will lock down eight city districts this weekend to mass test millions of people owing to another flare-up in Covid-19 cases.
Asian markets were also nervous ahead of key United States inflation data later in the day, which will provide clues about how aggressively the Federal Reserve might raise US interest rates.
The Dow Jones index slid 1.9 per cent at the Thursday close, while the S&P 500 posted its biggest single-day tumble as it gave up 2.4 per cent, and the tech-heavy Nasdaq index buckled 2.8 per cent.
At its meeting after the close of European markets on Thursday, ECB said it would raise rates by 25 basis points on July 21, then do another hike on Sept 8 that could potentially be bigger if inflation in the euro zone does not show signs of easing.
"We will make sure that inflation returns to our 2 per cent target over the medium term," said ECB president Christine Lagarde at a news conference. "It is not just a step, it is a journey."
Annual inflation has hit 8.1 per cent across the 19 countries of the euro zone, no thanks to rising commodity and energy prices resulting from the war in Ukraine and supply chain chokes.
Meanwhile, wages have been on an upswing across the continent.
ECB's peers like the Bank of England have also been raising rates.
ECB's move comes on the heels of the Fed's 25 basis point hike in March, followed by a 50 basis point hike in May.
The Fed has indicated that it will hike up its key lending rate by at least another 50 basis points in July, and possibly again in September as well.
Economists here think the hikes in rates in developed markets may have ramifications for Asia.
Mr Vishnu Varathan of Mizuho Bank noted that Asia is already importing inflation, with many economies across the continent facing extreme price pressures, particularly on the food and energy fronts.
Economists note that pressure has been building up for Asian central banks to tighten as macro-stability vulnerabilities mount in the face of rising prices.
"Asian interest rates are on the ascent, with the pace generally lagging behind the Fed and depending on whether their respective central banks have also front-loaded monetary policy tightening to combat inflation," said Ms Selena Ling, head of treasury research and strategy at OCBC Bank.
Central banks in Australia, New Zealand, Malaysia, South Korea and India have already raised rates in recent months. The Bank of Thailand and Bank Indonesia are expected to follow suit.
Meanwhile, some economists are also asking whether the rate hikes are too little, too late and could trip up the still fragile global economic growth.
Fears of a recession, or worse, stagflation, have heightened.
Given the challenges facing Europe amid the war in Ukraine, tighter monetary policy from ECB in the coming months could dampen euro zone growth even further and hurt European equities, say analysts.
"Interest rate hikes are unlikely to be fully effective against resolving supply side cost-push inflation," added Ms Ling. " The monetary policy lever of interest rate hikes largely serves to dampen demand conditions."
But rates can increase cost of borrowings and depress corporate earnings, especially for companies with high borrowings. Banks and other lenders, on the other hand, could benefit as interest income margins could potentially expand.
Thus, the stocks of companies that are heavily leveraged - which is typically the case with many technology companies - could face more downside pressure amid the environment of rising rates.
On the other hand, banks and other "growth stocks" could hold up better and in fact rise, say analysts.