SEA central banks seen to keep rates

MANILA, Philippines - Southeast Asian central banks would likely keep interest rates steady this year, following years of easing, with the first hike expected in the middle of 2014 as the global economy gains pace, a unit of debt watcher Moody’s Investors Service said in a report.

“Weak inflation and below trend growth will keep policy rates on hold for the remainder of 2013,” said Moody’s Analytics in a research note issued late Wednesday.

“We expect policymakers to begin tightening from mid-2014, when most economies should be growing at trend,” the report said.

For this year, Moody’s Analytics expects the 10-member Association of Southeast Asian (Asean) nations to collectively grow 4.8 percent, below the five-percent trend expansion rate.

The slower growth, it said, will be caused by a “lackluster” global demand, particularly in China, where export demand has weakened simultaneous with that of advanced economies in Europe and the US.

In particular, export-driven Thailand, Malaysia, Singapore and Indonesia have all experienced weaker first-quarter uptick, owing to this downside risk. The Philippines, however bucked the trend.

“The Philippines, meanwhile, continues to expand at a breakneck pace as the surging domestic economy more than offsets weakness in the export sector,” Moody’s Analytics pointed out.

The Philippine economy expanded 7.8 percent in the first three months, beating market expectations to become Asia’s fastest growing economy. Moody’s did not provide a specific full-year growth projection.

According to the report, robust consumption and investment will drive Asean growth, amid concerns cheap money from the US will be withdrawn later this year.

Healthy bank lending, spurred by record-low interest rates, will also contribute, Moody’s said, but should the $85-billion stimulus measures abroad end on signs of recovery, policymakers may turn concern to inflation.

At the same time, “persistent depreciation” of currencies in the region due to outflows could prompt monetary authorities to tighten soon.

“The severity and timing of rate hikes is crucial,” it said.

“This must be weighed against the possibility of higher rates and a withdrawal of foreign liquidity that could cause the economy to stall,” it explained.

Based on Moody’s Analytics estimates, the Philippines experienced the largest drop in the stock and foreign exchange markets across the region last month, when speculation the US Federal Reserve will taper off stimulus.

The local bourse plummeted 11 percent, while the peso dipped 5.3 percent against the greenback during the period. Both markets have since recovered some of their lost ground.

Nevertheless, the unit said in the long run, a recovery in the US would actually bode well to Asean growth through a rebound in export demand.

“A gradual tapering of monetary stimulus in the US signals that the world’s largest economy is on a sustainable path to recovery, adding upside risk to the outlook,” Moody’s Analytics said.