Rate hikes to be the exception rather than the norm

Malaysia and Pakistan have both hiked interest rates over the past week, and while the consensus and financial markets are expecting most other central banks in the region to tighten policy in 2018, we think rates in the majority of countries will either be cut further (China, Indonesia and Sri Lanka) or remain on hold. Even for those where we are expecting hikes later this year (Korea and India), we are pencilling in only gradual tightening. There are two key reasons why most countries will be in little hurry to raise interest rates this year. The first is that growth now looks to have peaked. It is notable that of the countries to have published Q4 GDP figures (Singapore, the Philippines and Korea), growth slowed in all three. The second reason is that inflation remains low in most countries and is likely to stay contained throughout the coming year. The key exception to all this is Pakistan, where we think this month’s rate hike is the start of an aggressive tightening cycle that is needed to bring the country’s precarious external position under control.