THE Association of Southeast Asian Nations (Asean) region may be approaching the end of its monetary tightening cycle despite expectations that commodity prices will remain elevated, according to the Asean+3 Macroeconomic Research Office (AMRO).
In the Asean+3 Financial Stability Report (AFSR 2023), the AMRO said the slowdown in inflation indicates across the region may already signal the start of efforts to ease monetary policy.
The AMRO also said there are also market expectations that the United States Federal Reserve is expected to stay on hold in the next few months.
“The pace of policy tightening has generally eased in the region in 2023 compared with 2022, reflecting a deceleration in inflation led by the decline in global fuel and food prices. Market pricing implies that the monetary policy tightening cycle is approaching its end in the US and in most economies in the region,” the report stated.
The AMRO said the Bangko Sentral ng Pilipinas (BSP) is expected to ease monetary policy in the next 12 months while the Bank of Thailand is expected to “hold over” during the period.
The expectations for the Philippines, the AMRO said, is based on the moderation in the second quarter of the country’s gross domestic product (GDP) growth, which was lower than market estimates.
However, the AMRO said this does not mean that the fight against inflation is not over. Commodity prices are expected to remain elevated on the back of the “tight labor market and the lagged effects of high inflation.”
This could lead to an increase in wages that would eventually find its way into the Consumer Price Index as wage hikes are inflationary.
“It is still too early to claim victory over inflation in the region. Upside risks to inflation remain,” the report stated. “The recent uptick in commodity prices poses another risk that could keep inflation high for longer.”
The recent uptick in inflation was due to higher crude oil and copper prices as well as more expensive rice due to the export ban imposed by India.
Oil prices increased on the back of supply side factors such as geopolitical tensions while rice prices also increased due to weather conditions that constrained supplies.
“A continued resurgence cannot be ruled out as speculative net long positions are building (or net short positions are reducing) in some of these commodities,” the AMRO said.
Meanwhile, the AMRO said among the risks faced by the region, the potential resurgence of inflation is perhaps the one risk that has raised the greatest concern because of its implication for even higher and more prolonged interest rates and their impact on the economies and financial systems.
The AMRO said financial market volatility may spike as it adjusts to the new normal of a “higher-for-longer” interest rate environment with receding liquidity.
Further, lingering concerns involve potential spillovers to regional economies during stress episodes, due to the existing vulnerabilities in the US banking sector, where key banking sector stocks have lost more than 10 percent of their value since the US regional banking stress in March 2023.
Despite ample US dollar liquidity globally, US dollar stress may emerge if investor confidence falters amid tighter global monetary policy and heightened market volatility.
“Furthermore, accelerated cross-border capital flows, driven by greater financial market integration and digitalization, can rapidly transmit shocks, creating new challenges for policymakers,” AMRO Chief Economist Hoe Ee Khor said.
Thematic studies in AFSR 2023 provide an in-depth analysis of financial stability risks from elevated debt levels in Asean+3, which reached 300 percent of the region’s GDP at the end of 2022.
The low-for-long interest rate environment that existed before the recent global rise in inflation facilitated substantial debt accumulation by businesses, households, and governments.
The AMRO said monetary and fiscal stimulus measures implemented during the pandemic further contributed to the rise in debt-to-GDP ratios.
The increased debt stocks and rising debt servicing costs in the current high interest rate environment have increased risks to financial stability, especially as pandemic support measures have been or are still being phased out.