Inflation in 90 per cent of the economies in Asia is likely to return to their respective central banks’ comfort zone by mid-2023, said Morgan Stanley, adding that a number of factors are also pointing toward an even faster pace of disinflation. The multinational investment firm said the possible return of inflation to the “comfort zone” will lead to the pausing of monetary policy tightening by central banks.
So far, various central banks globally have raised interest rates so as to contain rising inflation. “2023 will be a year of rapid disinflation. Inflation returns to the comfort zone for 90 per cent of the region by mid-2023, allowing central banks to pause tightening in 1Q23 (January-March). Winning the inflation battle means Asia’s domestic demand will be protected, allowing growth to outperform,” Morgan Stanley said in a report titled ‘AsiaEconomics | AsiaPacific – The Viewpoint: Rapid Disinflation and Growth Outperformance’.
Global food and energy prices have retreated to levels that are below where they were prior to the Russia-Ukraine conflict. On a year-on-year basis, global commodity prices are in negative territory and a significant disinflationary impulse is looming.
Headline inflation has already peaked in nine out of 12 economies while core inflation has peaked in six out of 12 economies, the report said. “We have long held a more benign view on the inflation outlook than the consensus. Our perspective is that Asia’s inflation is more cost-push in nature. Labour market dynamics have not been distorted by pandemic-era policies nor are they overheating,” it further said, adding that which implies that demand-pull inflationary pressures are less likely to emerge.
Further, on concerns of investors that China’s reopening will lift inflation in China and spill over to other parts of Asia, Morgan Stanley said inflationary effects would be rather muted. “At the starting point, China’s labour market is weak. We expect labour participation to rise alongside labour demand. Moreover, weak industrial activity due to sluggish exports, an expected, counter-cyclical slowdown in infrastructure spending will constrain the rise in commodity demand and prices even as the drag from property activity will reduce,” it said.