Interest rate increases on the horizon as Southeast Asia debates Fed risk

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MANILA/BANGKOK — For Southeast Asian central banks, monetary policy tightening is coming, but just not yet.

Economists say Thailand, the Philippines, and Malaysia will hold interest rates this week, though pressure is rising for policy makers to begin laying the groundwork for rate hikes.

The Philippines and Malaysia are seen as among the first in the region to move in the face of higher US rates and strong economic growth.

“The era of low rates globally is likely to be over and there is pressure for some central banks in the region to follow,” said Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore. “Where inflation and economic growth trajectory is strong, there are likely good reasons to tighten soon.”

The Federal Reserve is expected to raise interest rates again in December and while its recent increases were met with relative calm in financial markets, history shows that it is fraught with risks for emerging markets. The Fed’s signal of stimulus withdrawal in 2013 prompted a sell-off of the region’s currencies.

The Bank of Thailand will likely keep its key rate unchanged near a record-low 1.5% on Wednesday, according to all 23 economists surveyed by Bloomberg.

While the economy is starting to recover after years of sluggish growth, price pressures are muted and the central bank has been fending off calls for a rate cut, not a rate increase.

“Bank of Thailand is under pressure from the government to further ease to support growth,” said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong.

“The governor has stated that the rate is low enough and thus, we don’t expect rates to be slashed. That said, the Thai economy is in no shape to absorb higher funding costs.”

Two new external members appointed to the seven-member monetary policy committee last week are also seen as supportive of the central bank’s accommodative stance. Kanit Sangsubhan, 59, has worked with the government for most of his career and is now leading a committee overseeing the Eastern Economic Corridor initiative, a flagship project of Prime Minister Prayuth Chan-Ocha. Subhak Siwaraksa, 60, previously led TMB Bank Pcl and CIMB Thai Bank Pcl.

“These two members seem to be on dovish camp given their background,” said Kampon Adireksombat, an economist at Bangkok-based Kasikorn Securities Pcl.

“Having them in the board may delay the rate normalization process going forward.”

Bangko Sentral ng Pilipinas will probably hold its benchmark rate at a record-low 3% on Thursday, according to most of the economists surveyed by Bloomberg, even as rising oil prices, a weaker currency and economic growth of more than six percent stoke inflation.

Consumer prices climbed 3.5% in October from a year ago, the fastest pace since 2014.

The peso has fallen more than three percent against the dollar this year, the worst performer in Asia, and heading for a fifth year of losses.

“While inflation is within target, the currency has been really weak,” said DBS’ Mr. Cahyadi, the only economist out of 17 who predicts an increase.

“The policy rate is a signaling tool, and they may say something whether they are still going to be tolerant to the peso given pressure from the external environment.”

Bank Negara Malaysia (BNM) will probably keep the overnight policy rate unchanged at three percent when it meets on Thursday, according to all 22 economists surveyed by Bloomberg.

The government raised its economic growth forecast for this year to as much as 5.7% from 4.8% after expansion exceeded economists’ expectations for four quarters.

Inflation climbed to a five-month high of 4.3% in September, but is projected by the government to average between 3% and 4% this year.

“BNM could be another candidate to hike but it is unlikely to be before the elections,” said Euben Paracuelles, a senior economist for Southeast Asia at Nomura Holdings Inc. in Singapore.

The ringgit has risen about six percent this year against the US dollar, set for the first annual gain in five years. — Bloomberg