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May 25, 2023

The key message in Australia's and Malaysia's surprise rate hikes

Just as the market began to debate when the easing cycle in Asia might begin, two central banks in the region surprised the market by hiking rates unexpectedly in May. We believe these decisions contain important insight into how central bankers globally are thinking about monetary policy.

A change in approach to central bank policymaking?

In the most recent edition of Global Macro Outlook , we argued that the market may need to adjust to the idea that central banks could be much more comfortable with the concept of financial instability than in the past and that some level of financial stress—particularly when it’s able to help alleviate some excesses—could be a feature and not a bug of central bank thinking.

In our view, recent decisions by the Reserve Bank of Australia (RBA) and Bank Negara Malaysia (BNM) to resume monetary tightening following a short pause in their respective rate-hike cycle point in that direction and underline the upside risks to global monetary policy forecasts.

RBA and BNM deliver interest-rate hikes in May (%)

Chart of policy interest rates in Australia and Malaysia. The chart shows that official interest rates in both these economies have risen sharply in the past year.

Source: Reserve Bank of Australia (RBA), Bank Negara Malaysia (BNM), Macrobond, Manulife Investment Management, as of May 10, 2023.

RBA: a pause, followed by a surprise hike

Having only just paused its tightening cycle in April, the RBA surprised markets with a 25 basis points (bps) rate hike on May 5. Notably, the central bank also revised its growth and inflation outlook lower.

Although the RBA acknowledged that financial conditions in Australia have tightened a little further in recent months, the central bank highlighted two factors that led it to resume tightening: First, prices remain elevated, and it could be some time before inflation could return to target, and second, that house price inflation has stopped falling. Crucially, the RBA went on to say that some further tightening “may be required.”

Australia has one of the highest household debt-to-disposable income ratios in the developed world—it stood at around 211% as of 2021—and the country’s property sector is highly sensitive to changes in interest rates. Both of these factors make the Australian economy especially vulnerable to high interest rates.

BNM: preempting risks that can arise from an extended period of low interest rates

Following back-to-back pauses at the last two meetings (January and March), BNM’s monetary policy committee unexpectedly hiked the overnight policy rate (OPR) by 25bps on May 3. Market participants, who had been expecting a pause and had even started to price an end to the tightening cycle (including a near-term rate cut), were caught off guard.

There were no changes to BNM’s assessment of the country’s outlook for growth and inflation, although the rate-setting committee cited a new consideration in its decision to tighten again—"to prevent the risk of future financial imbalances.”

In taking a data-dependent approach, BNM has left the door open to further normalization, although the central bank took pains to note that its monetary policy stance remained slightly accommodative even after the most recent rate hike.

In terms of economic fundamentals, household and corporate debt ratios in Malaysia are among the highest in the Asia-Pacific region, making the economy particularly vulnerable to high interest rates. That said, BNM’s rate-setting committee argued that a higher OPR is needed “to prevent problems that can arise from long periods of low interest rates (e.g., too much borrowing)."

"We continue to believe that the market is premature in its pricing of the dovish pivot, both in terms of timing and magnitude."

Factors driving central banks to hike rates

Hindsight is perfect. Having put interest rates on hold in the previous months, the RBA and BNM found themselves in a position where their respective decisions to pause tightening were interpreted by the markets as proof that monetary tightening has ended and that rate cuts were imminent. This led to an improvement in market sentiment even as inflation—while moderating—remained stubbornly elevated and showed few signs that it was going to return to target within a reasonable timeframe.

Unsurprisingly, policymakers at both central banks took a cautious view of these developments, understanding that they could exacerbate financial risks, particularly in an environment in which wage inflation persists and evidence of significant downside risks to the global economy remains limited. In our view, they’re unlikely to be alone. Their peers at the U.S. Federal Reserve (Fed) and other global central banks are likely to ponder on the same few factors, which we believe will inform the global interest-rate policy path going forward.

We continue to believe that the market is premature in its pricing of the dovish pivot, both in terms of timing and magnitude. In our view, markets need to reassess the central bank put for asset prices. Naturally, this extends to our view on market pricing of Fed rate cuts as soon as July and where we see the risks to our view of a rate cut later in 2023.

Important disclosures

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management nor any affiliates or representatives (collectively Manulife Investment Management) are providing tax, investment, or legal advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by Manulife Investment Management and its subsidiaries and affiliates, which includes the John Hancock Investment Management brand.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

2909536

Sue Trinh,

Former Co-Head, Global Macro Strategy, Multi-Asset Solutions

Manulife Investment Management

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A change in approach to central bank policymaking?

RBA: a pause, followed by a surprise hike

BNM: preempting risks that can arise from an extended period of low interest rates

Factors driving central banks to hike rates

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