Asia week ahead: it’s not just about interest rate cuts

Following the revelation that the Reserve Bank of Australia (RBA) discussed rate hikes at its last meeting (and that’s not a typo – we did mean hikes, not cuts), the May CPI data is likely to beg the question: “well, why not true?”

We think May data will show a 0.3% month-on-month decline in price levels, mainly due to seasonal declines in holiday prices and clothing. Moreover, we will also see some impact from the sharply lower gasoline prices. But the May 2023 CPI index also suffered from the same negative impacts, and we believe the drag on recreation in 2023 was greater than we will see this year.

The net result of all this will be an inflation rate that could rise again from 3.6% annualized to 3.7%, with an outside chance of it rising to 3.8%. Australian inflation has not fallen on a monthly basis since reaching a low of 3.4% in December 2023. The pressure to respond with higher rates must increase. If we see inflation rising again, we will think very carefully about including a rate hike in our forecasts. There is one more inflation reading (July 31) before the August 6 RBA meeting, and that is the key quarterly report for the second quarter of this year, so it will be a high-risk gamble if we do.

Japan also releases Tokyo CPI data for June. This could be the highlight of the week for Japan, as the Tokyo figure provides an indication of the national CPI trend ahead. We expect inflation in Tokyo to accelerate from 2.2% in May to 2.5% annualized in June, due to a rise in pipeline prices. If inflationary pressures become more dominant over the next two months, the possibility of a rate hike in July will increase significantly.

Another central bank that may be under some pressure to revise its interest rate policy next week is the Bangko Sentral ng Pilipinas (BSP). The chances of a rate hike here are slim, but Governor Eli Remolona’s recent suggestion that the BSP doesn’t have to wait for the Federal Reserve before cutting rates has been silenced by the PHP’s weakness (likely as a direct result) . The PHP is the region’s weakest currency so far and has needed intervention from the BSP to support it. More recent comments from other BSP officials have regrouped behind the view that the BSP will be suspended until after the Fed.

We are not looking for any change in BSP policy at this meeting, unless there is a sudden weakening of the PHP, which could result from the suggestion that the Fed’s lead is being reconsidered. Let’s hope not.