Update Country Report Maldives 27 Sep 2021

Event

EIU has revised its monetary policy outlook for the US. We now expect the Federal Reserve (Fed, the central bank) to raise rates twice in the second half of 2022 and three times a year in both 2023 and 2024, taking the federal funds target rate above 2% by end-2024. We previously expected the Fed to begin increasing rates from mid-2023.

Analysis

The revision was prompted by the Fed signalling that monetary tightening and higher interest rates will come sooner than expected. The change in the forecast means we will begin to factor in greater near-term depreciation for Asian currencies against the US dollar, and will also adjust expectations for monetary policy settings. We previously believed that central banks in countries where economic recovery is barely under way (such as the Philippines, Malaysia and Thailand) would have space to keep policy accommodative in 2022. The change in our US forecast suggests that they will instead face a difficult choice between supporting economic activity and managing financial volatility.

In the past, the expectation of higher US interest rates has triggered capital outflows from emerging markets, leading to a weakening of local currencies and a rise in US dollar borrowing costs. Countries with high foreign debt/GDP ratios, which are most vulnerable to currency swings, are likely to sanction pre-emptive increases in their policy interest rates. Other countries will be worried about the inflationary aspect of a drop in the value of their local currency. We were already expecting Bank Indonesia and the Reserve Bank of India to take a lead among the region's emerging-market central banks and to raise policy rates from the second quarter of 2022; more are now likely to follow this schedule.

We expect Asia's developed markets to be less sensitive to the adjustment in our US forecast. Policy rates have already begun to increase in South Korea, and we expect them also to go up in New Zealand before the end of the year. The Bank of Japan is still set to maintain its ultra-loose policy stance, as this keeps a lid on debt-servicing costs and deflation remains more of a concern than inflation.

Impact on the forecast

The change in our US forecast means that we will bring forward our forecast for the start of monetary policy tightening in a number of Asian economies. We will also begin to factor in the likelihood of a stronger US dollar in 2022.