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The US Fed’s recent larger-than-expected rate cut and a sharp correction in the US dollar since August have provided welcome respite to the ASEAN-6 FX universe. Despite easing inflation at home, weak currencies had deterred policymakers from prematurely lowering rates, to prevent further compression in rate differentials. Post the US’ rate cut, the focus has shifted on their likely response.
While the US Fed’s move is an important input, domestic considerations will determine the timing and scale of action. Bank Indonesia (BI) and Bangko Sentral ng Pilipinas (BSP) lowered their benchmark rates by 25bps each ahead of the US Fed’s move, encouraged by the soft inflation path, and recovery in respective currencies (IDR not only erased YTD losses but is up on the year, alongside gains on the PHP). After the September cut, BI has maintained a dovish posture, expected to lower rates at least by another 25bps in 4Q24, and further 75bps next year. Having raised benchmark rates by the most in the region in the last two years, the BSP cut rates in August, with Governor Remolona signalling that at least two more were possible by end-2024 as inflation recedes. To complement the dovish bias, the BSP also undertook a deep reserve requirement ratio cut of 250bps to 7% for commercial banks and non-banks earlier this week.
The Malaysian ringgit has been the biggest beneficiary of the US Fed’s dovish pivot in the region, appreciating ~11% against the USD YTD. This provides room for Bank Negara Malaysia (BNM) to maintain its supportive growth monetary policy stance in the rest of 2024, amid benign inflation, but not venture into rate cuts this year. With the Vietnamese dong backing off from the weak side of its trading band while inflation has peaked, the State Bank of Vietnam has greater flexibility to keep rates steady in midst of recovery despite disruptions from Typhoon Yagi. The Thai baht’s rally has plied pressure on the Bank of Thailand (BOT) to lower its policy rate, given the potential risk this poses to the ongoing recovery in exports and tourism. Yet, the BOT’s outlook for firmer growth vs the need for financial stability is likely to see it hold the rate unchanged in 4Q24, unless there are clear signs of weakness in the external growth drivers. In summary, we expect the BSP to ease by the most between this and next year, whilst BNM is likely to remain the most cautious in the interest of any inflation uptick from further energy subsidy rationalisation.
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Related insights
- CNY Rates: Shifting tone in Politburo meeting27 Sep 2024
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- RMB strength and CHF watched ahead of SNB 26 Sep 2024
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- CNY Rates: Shifting tone in Politburo meeting27 Sep 2024
- Mixed markets with a weakish USD tone27 Sep 2024
- RMB strength and CHF watched ahead of SNB 26 Sep 2024