Fed hike ripples across asia as central banks look to respond

Highlights:

• Taiwan central bank delivered smaller-than-expected rate hike
• Bank of Japan next to watch with key policy meeting on Friday

The Federal Reserve's super-sized rate hike and firm policy tightening trajectory is prompting Asian central banks to weigh their options, seeking a balance between local inflation dynamics and a restless bond market, Bloomberg reported.

Among the first in the region to respond Thursday, Hong Kong raised its benchmark interest rate following Fed's move, a widely anticipated decision given the local currency's peg to the dollar. But even so, the city's main banks refrained from following suit, giving consumers and businesses some breathing room. 

Later in the day, Taiwan's central bank delivered a smaller-than-expected rate increase, as policy makers strive to tame inflation without hurting economic growth. 

The moves came as a relief rally in Asian stocks fizzled and Treasury yields rebounded, reflecting the prospect of a sustained campaign of Fed hikes to get runaway inflation under control. Markets had initially brightened on Fed Chair Jerome Powell's comment that super-sized hikes will be rare after the central bank lifted borrowing costs the most since 1994.

Soaring US interest rates place downward pressure on currencies in Asia and lure foreign investors away from the region. That in turn forces central banks in the region to raise their own funding benchmarks in response. Whereas global inflation has taken on a different flavor in Asia -- in some cases allowing central bankers to be more patient -- the Fed continues to add tightening pressure worldwide, reports Bloomberg.

Traders in Asia will remain on alert to policy guidance from other local central banks, especially those who have yet to tighten in this cycle.

Thailand's two-year non-deliverable interest rate swaps climbed to the highest in more than eight years this week, at a time when domestic inflation is at a 13-year high. The local benchmark interest rate has stayed unchanged since May 2020.

In Malaysia, ringgit interest-rate swaps are now pricing for the overnight policy rate to be raised by more than 150 basis points over the next 12 months, up from an increase of around 125 basis points at the end of May. 

South Korean policy makers remain focused on their own inflation battle, with Governor Rhee Chang-yong saying the Bank of Korea isn't considering an emergency meeting and that it's too early to determine whether it should follow with a 50-basis-point hike next month.

The Bank of Japan will face an imminent test Friday, when a key policy meeting will show whether the ultra dovish central bank can withstand pressure from the Fed and the local bond market. 

"The BOJ still thinks that inflation has yet to become sustainable in Japan. Look beyond the noise and there's no need for the BOJ to change its policy this time," said Masamichi Adachi, economist at UBS Securities. "The BOJ can't say this out loud because it's politically sensitive now, but a weak yen is a plus in order to revive inflation." 

Next week, Indonesia and the Philippines also will have policy decisions scheduled. 

Indonesia has kept its benchmark interest rate on hold this year, seeing a stable enough rupiah and manageable inflation. Bank Indonesia is now expecting consumer price growth to lurch just above its 4% top-end target in June, adding pressure to tighten.

The Philippine central bank raised its key interest rate last month for the first time since 2018 to combat Southeast Asia's second-fastest inflation.