Thailand hikes rates in dovish move as SE Asian nations diverge on policy

The policy decisions come against the backdrop of rising US rates, a rebound in EMs and weaker growth prospects

By BLOOMBERG

BANGKOK • The two biggest economies in South-East Asia are on different interest-rate paths: Thailand kicked off its hiking cycle while Indonesia is nearing the end.

The Bank of Thailand (BoT) raised its one-day bond repurchase rate for the first time since 2011, lifting it to 1.75% from 1.5% yesterday, in line with most economists’ forecasts. Indonesia’s central bank is set to keep its key rate on hold at 6% today after 175 basis points (bps) of hikes since May to stem a rout in its currency.

The policy decisions come against the backdrop of rising US rates, a rebound in emerging markets (EMs) and weaker global growth prospects.

“This was a dovish hike — similar to Korea’s one-off hike,” s aid Trinh Nguyen, a senior economist at Natixis in Hong Kong. “Inflationary pressures remain low and manufacturing is weak, so the BoT will likely be done with this hike.”

The BoT is the last of the main South-East Asian central banks to tighten monetary policy this year, concerned about a subdued economic growth environment and still low inflation.

Policymakers have been making it clear in recent weeks that a hike is imminent as it seeks to ward off risks stemming from a prolonged period of low rates. Governor Veerathai Santiprabhob has said the central bank may raise rates and then pause, a view backed by the chairman.

Five of the seven Monetary Policy Committee members voted to raise the rate by 25bps, while two called for no change.

All but five of 19 economists surveyed by Bloomberg predicted the decision.

The central bank cut its growth forecast for this year to 4.2% from 4.4%. Expansion slowed to a two-year low of 3.3% last quarter. Inflation projection retained at 1.1% average in 2018.

The baht has been among the most stable currencies in Asia this year, compared to large declines in the Philippine peso and Indonesian rupiah, allowing the central bank to keep policy unchanged for most of 2018.

The BoT acted to build policy space and curb financial stability risks, not because of currency wobbles or inflation getting out of hand.

What’s more, Thai domestic demand continues to gain traction and the outlook for household spendi ng a nd investment in 2019 remains relatively solid.

While a pause is likely at the next meeting in February, another 25bps-50bps of tightening later next year can’t be ruled out,” said Tamara Henderson of Bloomberg Economics.

The global and domestic environment may be more uncertain next year, with Thailand set to hold an election in February after more than four years of military rule.

Indonesia
Bank Indonesia (BI) has taken a front-loaded approach to policy in the face of rising US rates, with six hikes since May, including a surprise move last month, to help bolster the currency.

The rupiah has had some respite this quarter, gaining more than 3% against the dollar as EMs rebounded, giving BI more reason to pause.

Inflation remained subdued at 3.2% in November, well within the central bank’s 2.5% to 4.5% target band. A current- account deficit above 3% of GDP remains a key risk for Indonesia.

“Indonesia’s economy has performed well with stability maintained as growth momentum endures,” BI deputy governor Dody Budi Waluyo said by text message.

“The economic gains have been complemented by efforts to reduce the current-account deficit to within a manageable threshold.”

Indonesia is also facing an election next year. The economy is expanding at about 5%, short of the 7% targeted by President Joko Widodo when he came to power four years ago. Widodo is boosting cash handouts to the poor and fast-tracking infrastructure projects.