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APAC governments step up the fight to combat inflation amid roadblocks

Asia’s governments are stepping up their efforts to combat the inflation rate and defend local currencies. Besides monetary policy tightening—as we note below, Australia’s central bank will be one to watch this coming week—Asia-Pacific (APAC) governments are providing additional fiscal support (Japan), restricting imports (Nepal) and introducing outright export bans (Indonesia) to mitigate inflation growth. This is adding significant flux to the regional policy environment.

Politics and policy in Asia

Pressure will build on the Indonesian authorities to restart palm oil exports, following the imposition of a blanket ban on April 28th designed to preserve domestic supply in an effort to minimize the impact of inflation. The ban will increase commodity prices for items such as cooking oil, adding to inflation pressures for developing Asian economies. EIU assumes that the ban will be rescinded in the second quarter, but this latest example of policy unpredictability will undermine confidence in Indonesia. 

Hong Kong’s chief executive election, featuring only one candidate, will be held on May 8th. The non-contest will see the former chief secretary for administration, John Lee, assume the role. We expect him to firmly enforce the provisions of the national security law, while attempting to tackle some socioeconomic problems, such as housing. 

South Korea lifted its outdoor mask mandate on May 2nd, in a further step towards ending covid‑19 restrictions. However, this boost for domestic consumption will be offset by accelerating inflation. EIU is forecasting 2.7% GDP growth in 2022, after an expansion of 0.7% quarter on quarter in January-March.

Geopolitics and strategy in Asia

India’s prime minister, Narendra Modi, will visit Germany, Denmark and France on May 2nd‑4th. The visit will add momentum in EU‑India ties, and comes ahead of a planned resumption in June of negotiations (suspended since 2014) on an EU‑India free-trade agreement. India’s trade talks with Australia and the UK have also moved forward.

Impacts of inflation on economics and markets in APAC

The Reserve Bank of Australia (Australia’s central bank) is set to increase its policy rate for the first time since 2010 at its monetary policy meeting on May 3rd. The bank was previously signalling that it would not raise the rate until 2024, but a sharp acceleration in the inflation rate has radically altered its time frame, as anticipated by EIU.

Highlights from last week

Leaders of Nepal and India set to strengthen bilateral ties: A series of agreements will boost economic co‑operation, but border issues will remain unresolved. 

Higher inflation rate ahead for Vietnam: EIU has revised up its inflation forecast but the pace will not seriously crimp GDP growth. 

Depreciatory pressure grips Chinese currency: Whether the depreciation of the renminbi turns into freefall will depend largely on when the Shanghai covid lockdown ends.

More award-winning economic and political insights for Asian economies and markets can be found in EIU Viewpoint, our new analysis service. EIU Viewpoint provides unmatched forecasts, analysis and data for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.