As inflation eases, the issue of cutting policy rates will soon be on the agenda for ASEAN central banks. However, the crux of the debate is whether ASEAN central banks can cut ahead of the US Federal Reserve (Fed), and have enough monetary policy freedom to act differently from the Fed.
This is the issue raised in the report “ASEAN Perspectives: Fed one way, ASEAN another?” recently published by HSBC Bank’s Global Research Department on August 10.
The situation in the region will be quite diverse, according to HSBC. Even ASEAN countries with current account deficits such as Indonesia and the Philippines will have different moves. For example, Indonesia may cut rates before the Fed, because its real policy rate is already higher than before the pandemic, while its current account is in a more favorable position.
HSBC believes that the Philippine central bank will only cut interest rates after the Fed makes a move to cut interest rates. Photo: Arab News
The Philippines, however, does not have the same degree of freedom when it comes to monetary policy. The country needs more time to cool and stabilize domestic conditions. The Philippine central bank will only cut interest rates after the Fed does. Precedence suggests the Philippines has the least room to go against the Fed, HSBC said.
Meanwhile, economies with current account surpluses such as Malaysia, Thailand, Singapore and Vietnam will also act inconsistently. Countries with large surpluses can withstand the Fed's moves because they are not as in need of foreign capital, their exports can cover their import needs.
Malaysia’s current account is likely to return to pre-pandemic levels, giving the country more leeway with the Fed. Inflation is also under control, so Malaysia is likely to keep interest rates on hold.
Thailand’s surplus is likely to shrink further, forcing the central bank to keep interest rates higher than before the pandemic. Singapore, by contrast, has room to differ from the Fed, but monetary policy will only be eased when core inflation cools, according to HSBC.
Vietnam is a special case, with domestic issues taking precedence over external ones. The State Bank of Vietnam (SBV) has gone ahead of its ASEAN peers by cutting its policy rate by 1.5 percentage points (to 4.50%) in just three months. The SBV’s policy rate is already below pre-pandemic levels, and HSBC expects the bank to cut rates by another 0.5 percentage points in the coming months.
The State Bank of Vietnam has cut interest rates by 1.5% in three months, and may cut them by another 0.5% in the coming time, according to HSBC.
Vietnam’s domestic demand is weakening and imports are falling, leading to a more favorable current account position. To some extent, this also helps stabilize the VND exchange rate and gives monetary authorities some room to distance themselves from the Fed as they focus more on domestic issues.
HSBC also predicts that Vietnam’s inflation will rise in 2024, but not high enough to trigger interest rate hikes. The bank estimates that inflation will rise to around 3% in the second half of 2024, well below the SBV’s 4.5% threshold.
The key question for ASEAN central banks, according to HSBC, is how much monetary policy freedom each country has relative to the Fed. The answer to this question is key to determining when central banks can cut interest rates.
HSBC believes that diverging from the Fed’s path too early could lead to a massive capital flight and a sudden depreciation of the exchange rate as investors seek higher returns, a core issue for monetary policy makers, after inflation and growth. HSBC also forecasts that the Fed will start cutting interest rates in the second quarter of 2024 .
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