Asia feels the heat of US inflation fight

The US Federal Reserve's series of interest rate rises are forecast to crimp post-pandemic recovery across the Asia-Pacific region, especially in developing economies, with the Fed seen to slow down exports and consumer demand, and further weaken Asian currencies.

On Wednesday the Fed raised its benchmark interest rate by 50 basis points after several aggressive moves this year, as the US continues to battle high inflation. The Fed has also projected it will continue raising rates next year, to above 5 percent. The latest rise has sent jitters across the Asia-Pacific region, with markets trading lower on Thursday.

"We are ending the year with the Fed turning more hawkish," said Trinh Nguyen, senior economist at the French investment bank Natixis. "This is bad news for economies and sectors that are already leveraged and also expecting lower earnings."

Nguyen said that shortly after the Fed announced its latest rate rise, the European Central Bank raised interest rates by 50 basis points. The Frankfurt-based central bank has likewise signaled further rate rises in the coming months. This means that "external financial conditions are tightening", Nguyen said, and this would reduce domestic consumption in the US and the EU.

Lower demand in the US and the EU will likewise reduce demand for Asian goods, hurting exporters, she said. Asian central banks also need to either raise interest rates or let their currencies weaken further against the US dollar.

"Asia is getting less support from external sectors in 2023," Nguyen said.

Nawazish Mirza, professor of finance at Excelia Business School in La Rochelle, France, said US inflation stands at above 7 percent, with the annual target being 2 percent. "And the uncertainty about achieving this target is making Asian markets cautious."

The rise in global energy prices has elevated inflation levels worldwide, and this requires "a more hawkish rate management (that is) posing growth challenges for the US and EU", Mirza said.

But while the rate rises may hurt Asia's moves to rebound from the pandemic, Mirza said he hopes that local demand resilience in South Asia and Southeast Asia can mitigate the harsh impact of the US Fed rate rises.

Slower global demand

Asian economies rebounded this year following the opening of borders and easing of restrictions on movement. However, slower global demand and monetary policy tightening by central banks globally are limiting the region's pace of growth.

In a report issued on Wednesday, the Asian Development Bank revised its growth forecast for Asia to 4.2 percent, compared with a forecast of 4.3 percent in September. The 2023 forecast was also revised down to 4.6 percent, compared with a forecast of 4.9 percent in September. The Manila-based lender has forecast that regional inflation will be 4.4 percent this year and 4.2 percent next year.

Currencies across the region have fallen to record lows in the past few months on the back of the US Fed's aggressive rate rises. This has brought mixed blessings to the region. Commodity exporters and tourist havens such as Thailand and Malaysia are among the biggest winners, but net importers such as the Philippines and India suffer from the steep cost of imported food and fuel.

"India and the Philippines are net importing countries that are more prone to imported inflation," said Michael Ricafort, chief economist of Rizal Commercial Banking Corporation in Manila.

However, while weaker local currencies have helped exporting countries, rises in global food and fuel prices have wiped out the benefits of weaker currencies, he said. Sanctions imposed by the US and the EU against Russia have added to inflationary pressures and disrupted global supply chains in many areas, Ricafort said.

prime@chinadailyapac.com