Uncertain global recovery and inflation to keep interest rates low, seminar hears
Haphazard and uncertain economic recoveries around the world, combined with low inflation due to cheap oil, will ensure most central banks maintain accommodative monetary policies until the final quarter of the year, an economist predicts.
Deyi Tan, Asean economist at Morgan Stanley, told a seminar yesterday that global economic growth would continue to recover but at a gradual and unsynchronised pace. The US economy seems to be the only major one that has recovered so far, but its growth will also be moderate, she said at the seminar arranged by the Bank of Ayudhya, Krungsri Asset Management, and Krungsri Securities.
Meanwhile, low inflation will allow central banks worldwide to keep interest rates low while maintaining high levels of liquidity to support economic recovery and fight deflation.
"Since the start of this year, 11 central banks have eased [their monetary policies], and some of these easing [measures] were surprising as well, such as the decision of the Monetary Authority of Singapore," she said.
"Going forward in Asia, almost every central bank, with the exception of Taiwan and the Philippines, is expected to maintain and practise easing of monetary policy in some way or the other." Meanwhile, low inflation caused by lower oil prices can be scary, since a central bank could overshoot or undershoot its inflation target. This can damage their credibility and cause inflation expectations to be unhinged, and that is how low inflation can become persistent and eventually lead to deflation.
"The ‘3D’ challenge of deflation, debt and demographics is what emerging markets in the Asia region have to face at the moment," she said.
She explained that private and public debt in Asian emerging markets had increased since the global financial crisis in 2008. Most of such countries – 70 per cent – have debt levels close to or above 200 per cent of the gross domestic product.
Deflation would cause real interest rates to rise, and that would add to the debt burden of borrowers. Meanwhile demographic factors (6 out of 10 countries in emerging Asia) could lower the region’s growth potential and that would weaken these countries’ ability to repay their debt. These three factors would cause debt to rise faster than GDP growth she concluded.
Thailand’s household debt amounted to 84.7 per cent of GDP as of the third quarter of 2014. Thailand’s external debt was US$144.85 billion in the second quarter of 2014. Government debt was 45.7 per cent of GDP of $387.25 billion at the end of 2013.
Tan said the US Federal Reserve would most likely increase its interest rate in March 2016, as US economic growth will be okay in the first half of this year until the oil supply falls.
That would cause US growth to decelerate in the second half, while headline inflation is expected to be low in the first three quarters. That would give room to the Fed to prolong low interest rates until next year to support growth.
Kris Chantanotoke, executive vice president of Bank of Ayudhya, said an increase in the Thai policy interest rate could be delayed if the US increase is also put off. Thailand’s economic recovery will also influence the Monetary Policy Committee’s decision-making. Delayed government spending could lead to a slowdown in the economy, which could result in the MPC lowering the policy rate in the second half to shore up recovery.
"Going forward, the MPC will most likely maintain or lower the policy interest rate, and then it might lower it in the second half of the year if exports, consumption, and investment still have not picked up by then," he said.
