You know all the same problems are happening the second quarter in terms of
recession risk. Where are we right now.
Well I think a recession risk is getting actually becoming more and more serious
because more and more central banks are much more focused on fighting inflation.
I think the message coming out of Jackson Hole is basically you should
basically front load your rate adjustment.
There's no there's no value to waiting. So we've had a lot of jumbo rate hikes.
And obviously the worry about how that's going to transmit the economic activity
is a big concern. And of course because of the the Fed I'm
talking a lot of people because the economy in the US is actually a lot more
resilient. It's kind of amplifying the dollar's
strength which is making it harder for central banks on the receiving end of
the depreciation pressures to also not become more hawkish because obviously it
influences policy and that's where we are.
So we are going to war more. We've been adjusting our policy rate
adjustment a little bit more on the hawkish side even though in a recession
our risks are getting larger and larger. So essentially stagflation narrative is
becoming a predominant narrative at the moment.
You measure about intervention. We've seen three out of the last four
major economies outside the U.S. basically go through some major
interventions last week. Does it make you any convinced that
maybe there is going to be some sort of concerted coordination that needs to
kind of reverse the moves that we're seeing.
Well you know I mean normally if you think about coordinated interventions a
coordinated effects intervention you have to also believe whether the Fed or
the US is uncomfortable with dollar strength.
And at the moment it seems like the Fed seems to be OK with dollar strength.
That is that basically the intended transmission mechanism if it's policy
tightening by allowing stronger dollar to drive down this inflation.
So if the Fed is pretty relaxed about you know having the dollar strengthen
it's not clear to me. A one sided intervention will have a lot
of kind of lasting impact. There's a lot of I guess that word of
crisis being thrown around. You know you're getting a whiff of Asian
financial crisis or some of the superlatives in the price action we've
seen in currency markets. Do you think we're actually quite there
or are we just forgetting how you know what a global tightening kind of.
Well obviously feels like the market is very nervous right.
Because anytime you type and tighten and not just on policy you rate at that
speed in which we're tightening but then we also have liquidity adjustment in
terms of quantitative tightening you worry that something will break.
I mean clearly we're already seeing a lot of stress on the more fragile
emerging market. So you have these kind of smaller kind
of middle lower income economies that do have pressures.
You see all these pressures of default stress but so far those are smaller
lower middle income economies that are not yet asked.
You don't have any major large emerging market country that under distress.
But clearly I mean the stuff that we're seeing now with you know these banks UBS
Credit Suisse et cetera people are just worried about potential financial
stability risks that are happening. What does this mean for central banks in
the region. You know you're talking about Korea and
you've now forecasts they could be in some sort of recession as well.
At what point do you think that's what banks are going to have to shift the
focus away from just finding inflation and more towards boosting growth.
At the moment it's still too early right.
Because I mean you know we just had this news about oh back.
I mean even though we are seeing a lot of headline inflation maybe close to
peaking in our region or actually coming off we still have underlying core
inflation momentum that is still quite sticky in some places like for example
Malaysia or Singapore still picking up. So it's very hard for central banks to
really pivot at this point. They're probably still going to be quite
hawkish and even the activity definitely slowing down.
I guess the question is this is slowing down fast enough to cool inflation.
And at the moment I think in the short term I think central banks are still
going to be hawkish. We don't have at the moment our view is
the Fed is going to continue to hike until first quarter of 2023.
So in that backdrop it's probably hard for anyone to turn dovish when the Fed
is still hiking. I guess the question is after that if we
do start seeing the end of the rate hiking cycle in the US and because we
are also expecting a US recession in the second half of next year.
To what extent are central banks kind of pivot and in Asia.
I mean I think the places where we're going to look at are places where
interest rates are policy rate is already above neutral or headed above
neutral economies very vulnerable to the slowdown not only not only due to global
kind of goods and manufacturing slowdown but the slowdown from the kind of the
impact that the transmission of higher interest rates to the domestic economy.
This is where it places that have very high household debt very sensitive to
interest rates. So Korea is one in our radar where we
expect you know Korea we've just downgraded I think outside a frontier.
It's the first economy in Asia where we kind of really have a big in a recession
in the second half of this year. So we're thinking maybe Korea after
after hiking rates up to three and a half percent which is a terminal rate we
could actually see Korea start cutting in the third quarter of 2023.
So ahead of the Fed and there's a few emerging markets that also can cut ahead
of the Fed. And these are emerging market central
banks that have hiked earlier than the Fed or hike a lot more.