Central banks in Southeast Asia are facing a balancing act between targeting growth and inflation
Central banks in Southeast Asia are raising interest rates at varying paces in response to aggressive rate hikes by the US Federal Reserve. A faster pace of rate hikes in the Philippines, Thailand, and Malaysia will translate to a higher cost of borrowing in these countries. This will lead to tighter liquidity conditions—particularly for local partners. A slower pace of rate hikes in Indonesia will mean the rupiah will come under more pressure, although tailwinds from higher palm oil exports will prevent severe depreciation. The slow pace of rate hikes in Vietnam will not have a major impact on the dong as the central bank actively manages the currency.
Overview
Central banks in Southeast Asia have followed varying approaches to monetary tightening in recent months:
Philippines: Bangko Sentral ng Pilipinas (BSP) has followed a path of aggressive rate hikes, as inflation has surged and the peso has depreciated severely. The BSP hiked the benchmark interest rate by 25 basis points each in May and June, followed by a surprise off-cycle rate hike of 75 basis points in July.
Malaysia: Bank Negara Malaysia (BNM) announced back-to-back rate hikes in May and July of 25 basis points each to avert spikes in inflation and soften the depreciation of the ringgit, which has weakened in the last couple of months.
Indonesia: Bank Indonesia (BI) left its key rate unchanged at the June meeting to support recovery. However, the BI has indicated that it will start raising rates in Q3 to control inflationary pressures that have already breached the BI’s target range of 4%.
Thailand: The Bank of Thailand (BOT) kept the benchmark interest rate unchanged at its June meeting. However, the BOT has signaled the prospect of gradual rate hikes earlier than Q4, as inflation has surged to a near 14-year high and rising US interest rates have led to capital outflows that have weakened the baht.
Vietnam: The State Bank of Vietnam (SBV), which has not raised rates yet, plans to keep an accommodative monetary policy that supports economic growth.
Our View
While some central banks in Southeast Asia are moving quickly to tighten monetary policy to curb inflation and keep pace with hikes by the US Federal Reserve, others are planning to raise rates much slower to support economic growth. We expect the BSP to aggressively raise rates by a cumulative 200 basis points, taking the end-of-year rate to 4%, as the rate hikes already announced by the BSP will not be enough to curb the impact on inflation and currency. The BOT will likely shift from an accommodative stance and raise rates by a cumulative 125 basis points as inflationary and depreciatory pressures continue to intensify. In Malaysia, while inflation levels remain under control so far, the BNM will likely hike by a cumulative 100 basis points to soften depreciatory pressures on the ringgit. The BI will likely raise rates by a cumulative 75 basis points as inflationary pressures continue to mount. Meanwhile, the SBV will stick to an accommodative monetary policy and raise rates by only 25 basis points in 2022, as inflation levels remain relatively under control. We expect most central banks in Southeast Asia to raise rates at a faster pace in 2023 once the recovery gains sufficient momentum.
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