Weekly: Real Interest Rates in Asia: Room to Ease

Inflation rates have eased faster than bond yields, pushing up real rates and opening up room for rate cuts in some Asian economies.
Taimur Baig, Samuel Tse08 Mar 2019
  • High real rates can be seen in both at the short-and-long end of the yield spectrum
  • Central banks in India, Indonesia, and the Philippines will likely dabble in rate cuts
  • A major policy rate cut cycle is however unlikely
  • Financing and currency concerns and volatile investor sentiment would constraint the easing window
Photo credit: AFP Photo

Asian real rates have room to fall

Global financial conditions have improved dramatically in the last couple of months, with spreads compressing, yields falling, equity prices rallying, and capital deployment jumping. In contrast, curves are still flat, economic data remain poor, and there are no shortages of geopolitical uncertainties. With the impetus to follow the Fed dissipating and inflation at bay, real interest rates in select parts of Asia could do with some easing.

Below we plot short-term (using the difference of latest 3-month treasury yield and CPI inflation rate) and long-term (10-yr bond yield minus inflation) real interest rates in Asia. They are not apples to apples comparisons in some cases, given that the data span low and high inflation cases, as well as low and high debt economies. Still, it is instructive to see short-term real rates look strikingly high in India, Indonesia, and Malaysia. In the cases of Philippines and Thailand, the gap between real short-and-long-term rates look rather considerable as well. From a policy perspective, this would suggest, especially in the cases of India and Indonesia, perhaps some room for easing.

Source: CEIC, DBS Group Research
Notes: Data available till January'19 for all countries

The main reason for this outcome is a bout of rather dramatic disinflation in some countries, particularly Malaysia, where CPIyoy% is now in negative territory. Whatever easing of bond yields have taken place lately, that has been outpaced by disinflation. If oil prices stay in the USD50-60 range this year, and trade tariffs stop playing a distortionary role, inflation will likely remain well-behaved this year, giving central bankers the confidence to pursue some easing measures.

Looking at the data from a low frequency angle, we perhaps get a truer picture. In the following two charts, the historical annual calculations for real rates are done using annual average inflation and year-end bond yield rates figures (and the latest data point is the difference between the early-March yield and 2019 inflation forecast made by DBS economists). They show that short-term and long-term rates have climbed steadily in India and Indonesia in recent years, whereas they have eased in China, South Korea, and Thailand.

Source: CEIC, Bloomberg, and DBS Group Research. Real rates calculated by taking the difference between end-year 3-month treasury yields and average annual inflation. For latest, 2019 annual inflation forecast is used.

Along with the ongoing fiscal stimulus, China’s PBOC has been easing monetary policy for a while, and that has been picked up in the real rates figures. The authorities in the Philippines may want to follow suit as well, as we think there is scope for somewhat lower short-and-long-term real rates.

In India, the central bank turned dovish a few months ago, and we expect further dovish moves by the RBI. With respect to Indonesia, BI may well be inclined to ease rates this year, having been at the forefront of tightening policy last year.

We don’t expect a prolonged easing cycle though. While late cycle dynamics are prevalent, there is scope for volatility to rebound, which could require defence of currencies and shoring up buffers. Financing and currency concerns, geopolitical uncertainty, and volatile investor sentiment will likely get in the way of a major policy easing cycle in Asia, in our view.

Source: CEIC, Bloomberg, and DBS Group Research. Real rates calculated by taking the difference between end-year 10-yr treasury yields and average annual inflation. For latest, 2019 annual inflation forecast is used.

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Samuel Tse

Economist - China & Hong Kong

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