Asian countries need to tame the current waves of the coronavirus outbreak to prepare their economies for future Fed rate hikes, an economist said Monday.
Fed officials said last week that rate hikes could happen as early as 2023, diverging from earlier comments in March that said the US Federal Reserve doesn’t expect a hike until at least 2024.
Higher US rates would attract overseas investors, and central banks in other countries may have to raise their own rates in defense. Raising interest rates could help countries prevent too much capital from leaving their economies, but increasing interest rates too quickly increases the risk of an economic slowdown.
“The Asian countries need to get Covid under control so that once the Federal Reserve starts raising rates, the economies here are in good shape and can make the transition,” said Steve Cochrane, chief economist for the Asia-Pacific region at Moody’s Analytics CNBC’s “Squawk Box Asia”.
Cochrane predicted that the US Federal Reserve could hike rates by 25 basis points once per quarter starting in 2023. The so-called dot plot of the expectations of individual Fed members indicated two rate hikes this year.
Asian countries need to get a grip on Covid so that as soon as the Federal Reserve raises interest rates, the economies have an advantage here and can also handle the transition.
Chief Economist APAC, Moody’s Analytics
Many economies in Asia, including Japan, Taiwan and Malaysia, have seen a renewed spike in Covid cases in recent months – forcing authorities to impose stricter social distancing measures. The new waves of infection come as vaccination progress in the region lags behind that in the US and Europe.
The World Bank said in a report this month that economic output in two-thirds of East Asian and Pacific countries will remain below pre-pandemic levels through 2022. Factors dampening potential economic growth in these countries include widespread Covid outbreaks and a collapse in global tourism, the bank said.
Cochrane pointed out that Covid outbreaks across the region are “stilling” domestic demand and keeping inflation moderate.
The economist said several Asian countries, including China, South Korea and Singapore, are stepping up Covid vaccinations. “It looks good, but it has to go on,” he said.
But other countries, including Thailand, Indonesia and the Philippines, have not effectively controlled the outbreak and do not yet have strong vaccination programs in place, Cochrane added.
– CNBC’s Jeff Cox contributed to this report.