Economists say central banks in Asia that have remained accommodative even in the face of soaring inflation could find their resolve tested after a surprise tightening by their counterparts in the region returns their currencies vulnerable to sale.
Thailand, which kept its key rate at a historic low to support the economy’s recovery, saw the baht emerge as the worst performer of the month out of 12 Asian currencies tracked by Bloomberg. The Indonesian rupiah weakened for the sixth straight week amid foreign capital outflows driven by the country’s widening monetary policy gap with the United States.
“A wobbly exchange rate and an increasingly determined Fed are adding to the urgency for monetary tightening in many Asian markets,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “As interest rate hikes follow in quick succession elsewhere in the region, central banks in Thailand and Indonesia may now be accelerating their own responses.”
Singapore and the Philippines both tightened monetary policies in emergency measures on Thursday after data showed US inflation was on the rise and the Federal Reserve eyed another big hike, with some betting on a full increase of one percentage point.
These measures will not only put pressure on Thailand and Indonesia, but also on countries like India which are already bringing their policies back to pre-pandemic levels.
Indeed, higher borrowing costs in the United States tend to drain capital from emerging markets as fund managers chase yields amid negative real rates in Asia.
Still, the extent to which policy rates are negative in real terms will likely determine how much authorities need to act, said Robert Carnell, chief Asia-Pacific economist at ING Bank NV. That means Indonesia and Malaysia may have to do less to support their currencies, with inflation rates still “reasonably low”, he said.
Thailand does not have this luxury. The Bank of Thailand is “well behind” in raising borrowing rates, according to Carnell, while even those that have already tightened such as Singapore, the Philippines, Taiwan and South Korea have “more work to do “.
The won and the Philippine peso are among the biggest declines this year in the region, even after successive interest rate hikes.
While the Philippines has already signaled that it could rise again in August, Thailand’s central bank said on Thursday it does not plan to hold an interim meeting to review rates ahead of its scheduled August 10 decision, reiterating concerns. previous comments that she would maintain the normalization of the gradual policy.
“There will be pressure on the Thai baht and the BOT will have to decide if it can afford to swim against the rising Fed tide,” said Trinh Nguyen, senior economist for emerging Asia at Natixis SA.