Rate policy diverges in South-East Asia as currency rout deepens

The Philippines and Indonesia finding more pressing needs to tighten, Thailand and Malaysia have more patient stance

By BLOOMBERG

SINGAPORE • South-East Asia’s central bankers are taking diverging policy stances even as their economies get slammed by the same headwinds.

Dollar strength, higher oil prices, and global monetary policy tightening are adding pressure on key emerging markets (EMs) to protect their currencies and curb outflows.

Amid all that volatility, central banks still have their inflation targets to consider. While the pickup in crude costs has seen policymakers across South-East Asia add fuel subsidies to their inflation-fighting toolbox, their interest-rate policy is much less uniform.

The Philippines and Indonesia are finding more pressing needs to tighten policy for different reasons, while Thailand and Malaysia stick with a more patient stance. Here’s how inf lation is factoring into monetary policy approaches across South-East Asia:

Philippines
2018 target inflation range: 2% to 4%. Current CPI (YoY): 5.2%.

The inflation hot streak shows no signs of abating in the Philippines, with data yesterday showing prices surged 5.2% in June from a year ago.

That was higher than all forecasts in a Bloomberg survey, giving more credence to those who worry the economy could be overheating amid strong growth.

The peso is among the weakest currencies in Asia this year, which gives more reason for officials to consider tightening as EMs aim to stem outflows.

The central bank hiked its overnight reverse repurchase rate by 25 basis points (bps) each in May and June, with governor Nestor Espenilla keeping the door open for more increases.

Indonesia
2018 target inflation range: 2.5% to 4.5%. Current CPI (YoY): 3.12%.

Bank Indonesia’s surprise move last week to raise the benchmark interest rate by 50 bps — on top of two hikes in May — shows how determined officials are to stabilise the rupiah amid investment outflows.

A third straight easing in inflation in June, as reported on Monday, should give officials some reassurance, but with the currency still under pressure, price growth isn’t the primary target of central bankers right now.

“Even if the rupiah stabilises in the short term, we expect more rate hikes as long as the current account deficit continues to widen and the US Federal Reserve keeps raising interest rates,” said Tamara Henderson of Bloomberg Economics.

Thailand
2018 target inflation range: 1% to 4%. Current CPI (YoY): 1.38%.

Thai inflation unexpectedly eased a bit in June from a year earlier, against economists’ projections for a fourth straight increase, data showed on Monday. Even so, bets are mounting the Bank of Thailand is moving closer to tightening monetary policy.

The baht is down 1.6% against the dollar this year. Policymakers discussed conditions and appropriate timing for policy normalisation at their meeting on June 20, when the benchmark rate was left near a record low of 1.5%.

Economists at Australia & New Zealand Banking Group Ltd see a 25 bps rate hike as early as November.

Malaysia
2018 target inflation range: [none]. Current CPI (YoY): 1.8%.

Inflation has been less of a focus in Malaysia, where a political transition is fuelling policy uncertainty, including at the central bank following the sudden resignation of the governor.

As a net energy exporter, higher oil prices have a more benign effect on inflation in Malaysia. The scrapping of a 6% Goods and Services Tax should also keep price growth tame, at least until the planned introduction of a sales tax later this year.

After an early interest-rate hike in January, inflation has steadily eased, lending little urgency to tighten policy.

Just four of 22 economists surveyed by Bloomberg in mid-May saw another increase in the benchmark interest rate by year-end.