Surprising tightening in Asia puts pressure on the dovish Central Banks


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The Asia Central Banks remained calm despite the soaring currency. According to economists, their resolve may be tested by a sudden tightening of their currencies by their peers in the region. This makes them vulnerable to selling off.

Thailand, which has kept its key rate at a record low to bolster the economy’s recovery, is seeing the baht emerge as this month’s worst performer out of 12 Asian currencies tracked by Bloomberg. The Indonesian rupiah weakened for the sixth straight week amid foreign outflows driven by the nation’s widening monetary policy gap with the US.

“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 are delivered in quick succession elsewhere in the region, central banks in Thailand and Indonesia might now speed up their own responses.”

After data showed that the Philippines and Singapore had both made emergency moves, they both tightened their monetary policy in an effort to save face. The US was experiencing a heat wave and the Federal Reserve was contemplating another big hike. Some bettors were willing to take a full percentage point rise.

Those moves won’t just put pressure on Thailand and Indonesia, but also countries like India that are already returning policy toward pre-pandemic levels.

That’s because higher borrowing costs in the US tend to drain capital from emerging markets as money managers chase yields amid negative real rates in Asia.

Robert Carnell from ING Bank NV Asia Pacific chief economist said that the real extent of negative policy rates is likely to dictate how much authorities must act. Indonesia and Malaysia may need to do less for their currencies to be supported, with rates still “reasonably low,” he said.

Thailand doesn’t enjoy this luxury. The Bank of Thailand is “well off the pace” in raising borrowing rates, according to Carnell, while even those that have already tightened like Singapore, the Philippines, Taiwan and South Korea have “more work to do.”

The won and the Philippine peso are among this year’s biggest decliners in the region even after successive interest rate hikes.

While the Philippines has already signaled it may hike again in August, Thailand’s central bank said Thursday it has no plans to hold an interim meeting to review rates before its scheduled Aug. 10 decision, reiterating previous comments that it will keep policy normalization gradual.

“There will be pressure on the Thai baht and the BOT will need to decide whether it can afford to swim against the Fed’s rising tide,” said Trinh Nguyen, senior economist for emerging Asia at Natixis SA.

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