Surprise tightening in Asia ups pressure on dovish central banks

Central banks in Asia that remained dovish even in the face of soaring inflation may see their resolve tested after a surprise tightening by peers in the region leaves their currencies vulnerable to sell-off, according to economists.

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.”

Singapore and the Philippines both tightened their monetary policies in emergency moves Thursday after data showed inflation in the US was running hot and the Federal Reserve was considering another large hike, with some betting on a full percentage point increase.

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.

Still, the extent to which policy rates are negative in real terms are likely to determine how much authorities need to act, said Robert Carnell, chief economist for Asia Pacific at ING Bank NV. This means that Indonesia and Malaysia may therefore need to do less to support their currency, with inflation rates still “reasonably low,” he said.

Thailand does not have that 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.