Asia's surging coronavirus infections and slow pace of vaccinations is testing the limits of what central banks can do to further support what, until recently, had been the world's stand out economic recovery.
With interest rates already low, the likely policy response will center on more government borrowing, relegating central banks to a supporting role. That backdrop will overshadow decisions this week where policy makers are expected to keep rates on hold -- Indonesia, South Korea and New Zealand.
"In my view, there is little room for further monetary policy stimulus, at least in terms of traditional policy levers like interest rate cuts," said Tuuli McCully, head of Asia-Pacific economics at Scotiabank. "I expect additional fiscal stimulus to play a key role in helping economies."
In Jakarta, the finance ministry has offered more tax cuts to spur economic activity and plans to stick with its $84 billion-net bond issuance target this year, even as borrowing costs climb. Bank Indonesia is expected to keep rates unchanged Tuesday.
South Korea's economy is being cushioned by soaring exports even as rolling social distancing restrictions damp consumer spending -- prompting the government to pledge more fiscal spending to create jobs. The Bank of Korea is also expected to remain on hold when it meets Thursday.
New Zealand's economy continues to recover, amid a low case count, after contracting at the end of last year. The Reserve Bank of New Zealand is expected to hold steady Wednesday after the government's annual budget last week included the biggest increase in welfare payments in more than a generation as part of measures to support growth.
India is the global epicenter of the latest virus surge, and even other economies that had kept infections under control -- such as Singapore and Taiwan -- are also battling flare ups. Japan continues to struggle with spreading cases and even China is seeing an uptick in infections.
The region is also lagging in the vaccination roll out, with Singapore having inoculated around 30% of its population, followed by China at around 15% and the others well behind.
"The region's relatively slow vaccine roll out is increasingly proving to be a drag, including for the more developed economies whose hitherto successful strategy to more emphasize contact tracing, rapid testing and social distancing, is being challenged by the recent surge in cases," according to Sameer Goel, Deutsche Bank AG head of emerging market research.
The Reserve Bank of India will be central to how India responds to the crisis, given the government has only limited fiscal space with a budget deficit of 6.8% of gross domestic product in the year to March 2022, down from an estimated 9.5% last year. Benchmark rates have remained unchanged for a year amid sticky inflation.
Next month the RBI's monetary policy committee is likely to keep rates unchanged, but Governor Shaktikanta Das could expand a quantitative easing program for the second straight quarter to keep borrowing costs under check.
Other Asian central banks are supporting their nations' fiscal policies. Bank of Japan Governor Haruhiko Kuroda said last week he will continue with powerful monetary easing, indicating his yield curve control program will keep government bond yields low to help additional fiscal spending. China's central bank is also continuing to ensure borrowing costs are kept low for those parts of the economy that need it, while keeping an overall disciplined approach to the volume of its stimulus.
"Monetary policy is not as effective compared to fiscal policy in responding to the current virus wave," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. "Extension of fiscal support is what is needed."
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