Consumer prices might increase less rapidly than currently expected given that supply imbalances are reversing, global food costs have fallen and wage pressures are being muted, Morgan Stanley economists led by Chetan Ahya wrote in a note on Wednesday.
Price gains might be stickier in Australia, South Korea and Singapore, while remaining within the comfort zone in China, they said.
Morgan Stanley’s prognosis might offer some comfort to Asia’s stock and bond traders, who have been rocked by fears that regional central banks would follow the US Federal Reserve with aggressive rate hikes.
Photo: Bloomberg
The forecast also coincides with speculation that a weakening global outlook could cause monetary policymakers to opt for more measured increases.
“The level of interest rates needed to slow growth and demand will not be as high as what is being perceived by markets,” the analysts wrote. “We are increasingly confident that inflation is peaking this quarter, and that inflation could start to surprise on the downside in the coming months.”
Emerging Asia bonds have fallen for four straight months, while the MSCI Asia Pacific Index is trading near a two-year low after the Fed delivered a series of outsized rate hikes to tame inflation.
Policymakers in South Korea, the Philippines, India and Malaysia have also tightened.
South Korea’s one-year one-day swap rate predicts policymakers could raise their benchmark to 4.2 percent by the middle of this month, versus economists’ forecasts for it to peak at 2.5 percent by the end of the year.
The two-year non-deliverable interest-rate swap in Thailand shows that traders are pricing in more than 200 basis points of rate hikes over that period.
While traders are betting on further hikes, global inflation is showing some signs of cooling.
Costs of cooking oils to wheat and corn — a key component of Asian inflation gauges — have tumbled to their lowest levels in months, while the Bloomberg Commodity Index has plummeted from a high set a month ago.
“With growth concerns now coming to the fore and perhaps taking some precedence over inflation risks, we think it has reduced the risks that central banks in the region will have to go deeply into restrictive territory,” the economists wrote.
Separately, Fed officials are expected support raising interest rates at their meeting later this month by 50 or 75 basis points, minutes of the US Federal Open Market Committee’s June 14 and 15 policy meeting released on Wednesday showed.
Maintaining the US central bank’s credibility to control inflation is crucial, it said.
“Many participants judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public began to question the resolve of the committee,” the minutes said.
“They recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” it said.
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