Nomura said India’s terminal repo rate in this tightening cycle may rise to 6.1% by March 2023, against its earlier terminal rate projection of 6%. The repo rate currently stands at 5.4%.
This change in prediction followed the surprise rise in retail inflation, measured by consumer price index (CPI), which has gone back to 7% in August after keeping below this level in the previous three months.
Nomura predicted more frontloaded rate hikes and higher peak terminal rates for the US Federal Reserve, European Central Bank and Bank of England.
But, it cited three reasons for Asian central banks to maintain a gradual hiking pace.
“Asia’s inflation cycle is benign relative to both the US and Europe, and there is limited evidence of a wage price spiral,” Nomura said, adding that developed market central banks that are tightening into a recession represent a growth headwind for Asia via tighter financial conditions and weaker export demand. Thirdly, Asia’s central banks have a different policy reaction function, and supporting the recovery is still a priority for many emerging market Asian central banks.
A key risk for Asia is, however, the continued currency weakness.
“But we do not see imported inflation as a major threat, if commodity prices are contained. Moreover, we expect Asian central banks to continue their eclectic approach of using foreign exchange intervention to slow the pace of depreciation,” Nomura said.
The group still expects core inflation to rise in coming months, reflecting the delayed reopening boost to consumption and services, but a more stable outlook for oil and commodities prices would lower the pipeline price pressures, lower headline inflation and also lower household inflation expectations next year. “Unlike the US, we also see limited evidence of a wage price spiral in Asia, with the exception of some risks in Singapore.
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