SE Asian central banks may turn hawkish

MANILA, Philippines - Southeast Asian central banks may turn hawkish in the second half of 2013 and raise low policy rates to fight inflationary pressures seen to come with continued robust growth, an investment bank said.

“With growth and inflation bottoming out, central banks in ASEAN are becoming more cautious about potential overheating pressures,” Barclays said in its latest Global Economics Weekly.

“Indeed, guidance from policymakers has become more balanced, and, we think, could turn hawkish in the coming months if strong growth momentum continues,” it added.

Among the 10 members of the Association of Southeast Asian Nations (ASEAN), Barclays singled out Malaysia, Indonesia, Thailand and the Philippines- ASEAN-4- as those which have been found to have successfully weathered the financial crisis last year.

Domestic demand, it said, has been driving growth in the ASEAN-4, which collectively expanded by 6.2 percent last year, up from 4.4 percent in 2011. For this year, growth is expected to pick up to 6.3 percent.

This came with low inflation on the backdrop which allowed monetary authorities in the region to ease bank lending rates to support economic growth.

“However, we see signs that inflation is likely to rise in the coming months, which would suggest a falling bar for monetary tightening,” Barclays said.

“As such, against an improving global backdrop and strong domestic economies, we expect some ASEAN countries to start tightening policy via calibrated rate hikes in the (second half),” it explained.

Malaysia and the Philippines will lead the way, it said, predicting a 25-basis-point adjustment in the fourth quarter. That would mean policy rates would increase to 3.75 percent and 5.75 percent from their record-lows of 3.5 percent and 5.5 percent.

Indonesia could widen the width of its interest rate corridor, while Thailand may turn “neutral” and hold rates, the bank said.

The Bangko Sentral ng Pilipinas slashed key rates four times last year by a total of 100 basis points as inflation remained subdued at 3.2 percent against above-target growth of 6.6 percent.

While raising key rates may attract more inflows to these economies, Barclays said central banks would choose to deal with them- and the corresponding currency appreciation- with macroprudential measures.

Among ASEAN-4 units, the Thai baht and the Philippine peso are “leading the gains” against the greenback. A strong currency trims the value of dollar export and remittance earnings, among others.