On 30 November, the Bank of Korea (BoK) announced a 25 basis point rate hike, its first rate rise in six years. As the world’s major central banks gradually shift toward tighter policy, Asia has been slower to pull away from accommodative mode. The Bank of Japan is maintaining ultra-easy policy and will likely be last among its peers to withdraw quantitative easing. Outside of China, where tightening reflects the bigger challenge of excess leverage, major Asian central banks until now have not followed the Federal Reserve’s lead in raising rates.
But we believe the BoK’s rate rise signals the start of a broader shift toward policy normalization across Asia due to a favorable macroeconomic backdrop:
- Regional GDP readings have been above trend in recent quarters, with Asia ex Japan (AxJ) growth likely to hit 6.1% both this year and next. This points to rising domestic demand and, alongside greater investment and narrower output gaps, suggests a pickup in employment and wages, which should allow for higher rates.
- Regional credit growth has begun to rise, with AxJ bank lending now past the cyclical trough of 7% growth and heading for a double-digit rate of expansion.
- The second-round effects of higher oil prices, which are up 11.5% this year, will likely start fanning core inflation in the region – or at least give central bankers room to justify higher rates.
So as Asia enters the middle stage of its expansion, crisis-era monetary policy looks increasingly unnecessary. We expect rates to gradually normalize in the region next year, and prefer AxJ equities over US investment grade bonds in our APAC-focused portfolios.
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