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Bank Indonesia’s rate hike last week led investors to question ‘if and which’ central bank might follow next. This boils down to the pace of domestic disinflation, view on growth, flows stability and currency outlooks. Inflation has been broadly stable to lower across the region, barring pockets of food driven upswing in Philippines, Indonesia, and Vietnam. With exports turning up, and consumption benefiting from supportive labour markets, most central banks are sanguine on the growth outlook.
In contrast, portfolio flows, and currency stability have been the main sticking points, owing to a wider rate differential, with five of the six ASEAN-6 currencies down more than 3% on year-to-date (YTD) basis against the dollar.
The let-up in dollar strength this week provides a breather. Yet the bias is for further USD strength, which will weigh on regional FX. Indonesia is likely to keep the door open to further policy tightening to preserve rupiah volatility (Bank Indonesia’s proactive hike), even as its real rates are the highest in the region. The PHP faces depreciating pressures (-3.8% YTD), with bond yields adjusting up to provide attractive differentials. MYR volatility will continue to garner BNM’s attention during its May decision. The MYR has outperformed over the past month, reflecting some effectiveness of ongoing initiatives to encourage inflows. THB is ASEAN-6’s worst performing currency (-7.6% YTD), with volatile external developments limiting the space for policy rate cuts. With major Thai commercial banks reducing the Minimum Retail Rate (MRR) by 25bps for six months to alleviate the debt burden of vulnerable borrowers, the chance of a policy rate cut being delayed/held off is rising, unless growth disappoints significantly.
Our expectation of an external-led growth recovery for Singapore’s economy still faces downside uncertainty. The VND also faces depreciating pressures vs the USD, hovering at the weak end of the +/-5% trading band from the mid-point, which poses upside imported price risks to headline inflation that hit a 15-month high of 4.4% YoY in April 2024.
Pooling all these views, Philippines is likely to join Indonesia in delaying rate cuts until next year, joining Malaysia and Vietnam to maintain an extended pause. We note that Vietnam had already lowered its refinancing rate by 150bps in 2023 to stave off growth risks, but the dovish space for Thailand is increasingly narrowing. Rate increases are unlikely to be the first port of call but a string of strong US data pushing USD sharply higher will bring the spectre of selected ASEAN hikes back on to the table.
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