Central banks in ASEAN will continue tightening monetary policy through 2023
Central banks in ASEAN will raise rates through 2023 to alleviate inflationary and depreciatory pressures created by global headwinds. Firms that are considering large capital expenditures in the next 15 months should account for the added costs that will be associated with higher interest rates. Firms and their distributors that depend on revolving lines of credit for their business will see borrowing costs rise to varying degrees depending on the market. Costs in the Philippines will rise the most. Firms that use distributors who are carrying large inventories to manage supply chain disruptions will see heightened inventory carrying costs.
Overview
Inflationary and depreciatory pressures have intensified over the past six months due to the Ukraine war and aggressive tightening by the US Federal Reserve. Central banks in ASEAN, with the exception of the State Bank of Vietnam (SBV), have begun tightening rates to soften these pressures. Bangko Sentral ng Pilipinas (BSP) has been the most aggressive, raising its benchmark interest rate by a cumulative 225 basis points until now. Bank Indonesia (BI) and Bank Negara Malaysia (BNM) have both raised by 75 basis points each, while Bank of Thailand (BOT) has raised rates by a cumulative 50 basis points.
Our View
Due to persistent global supply shortages, inflation levels will remain elevated over the next 12 months. Moreover, as the US Federal Reserve continues to raise rates aggressively, ASEAN currencies will weaken further. As a result, central banks in ASEAN will be forced to continue raising rates through 2023. The BSP’s priority will be inflation and depreciation control, with rate hikes through 2023 being the most aggressive. Meanwhile, the BOT, BI, and BNM will tread a fine line between softening these pressures and supporting a post-COVID recovery. Hence, rate hikes by these three central banks will continue to be gradual and small in size. On the other hand, the SBV will focus on growth while using other policy tools to control inflationary and depreciatory pressures.
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