Asia well-placed to cope with the Fed’s next rate hikes

The US Fed looks set to increase interest rates soon, possibly as early as its June meeting, and we think it will end up hiking more than is generally expected over the next couple of years. However, Emerging Asia looks well-placed to cope with this next stage of US monetary tightening. Most countries in the region run current account surpluses and have a healthy buffer of foreign currency reserves, which will guard against instability in the event that US rate hikes cause foreign capital inflows to dry up. Foreign currency denominated debt is also low across most of the region, which limits the risk of US rate hikes and dollar strength causing financial stress. Finally, there is little reason to think that Asia’s central banks will need to follow the Fed’s lead and tighten policy. Admittedly, the exchange rate regimes of Hong Kong and Singapore mean that a rise in US rates will push up local rates in those two economies, but elsewhere it will be local factors, not the actions of the Fed, that determine the next move in interest rates.