Will Stimulus Put a Risk on Inflation and Weaken Rupiah?

Summary

The COVID-19 pandemic has prompted central banks around the world, including in Asia, to intensify stimulus on financial markets. UBS in its research entitled "Asia: Too much or too little liquidity?" said investors focused on the impact of debt monetization by central banks in Asia, on the fear that central banks' stimulus policies will raise inflation and weaken the exchange rate of Asian currencies against the US dollar.

The UBS research team said the investor's concern was too excessive. "Concerns over inflation and currency depreciation due to central banks' policy supports in Asia for government deficit financing are excessive for now," UBS wrote in the research.

There are several reasons for UBS's opinion. First, domestic credit expansion in Asia is not too fast. Secondly, excess capacity will prevent credit growth from turning into inflation or a trade deficit. Third, the expansion of US banking credit, including The Fed, will reverse the impact of credit expansion in Asia on exchange rates. Lastly, depressed domestic credit growth increased foreign exchange reserves show that the purchase of government debt securities helped meet domestic liquidity needs instead of encouraging capital outflows.

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