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The US Fed’s rate cut boosted the US dollar and rates in overnight trade, adding to the discomfort of the regional central banks. ASEAN-6 currencies have been on the backfoot since October, with additional build-up in expectations that CNY might be used as a part of the policy kit to offset the impact of potential hike in tariffs proving to be an headwind. In this light, it is not surprising that the ASEAN-6 central banks remain on a cautious footing.
The Bank of Thailand (BOT) unanimously maintained its policy rate at 2.25% during its final meeting of 2024 on Wednesday – the first such unanimous decision in about a year. Despite flagging increased external uncertainties, policymakers assessed that the current rate was consistent with near-potential economic growth, inflation recovering towards the lower-end of its 1-3% target, ensuring long-term macro-financial stability, while preserving policy space. Our baseline view is for the BOT to hold its policy rate at 2.25% in 2025, but with considerable downside risks. A sharp escalation in geopolitical and trade tensions under Trump 2.0 could significantly slow Thai exports and investments, at a time when domestic credit metrics are deteriorating. This could lead to weaker-than-forecast economic growth and headline inflation in 2025 (latest BOT projections are at 2.9% and 1.1%, respectively, in 2025, vs. 2.7% and 0.4% in 2024), potentially forcing the BOT to utilise its policy space to mitigate the downturn.
Bank Indonesia also extended its pause at its monthly rate review on Wednesday. Indonesia’s year-to-date inflation average stands at 2.4% YoY vs 3.8% in the comparable period a year ago. Despite a small uptick in November’s core inflation to 2.3%, there was a broad-based slowdown amongst the other sub-categories. This together with a slight deceleration in 3Q’s growth ticked the box for the BI to retain a dovish bent, but weakness in the currency is a bigger bother for policymakers, in the face of US-driven uncertainties. Markets await the inauguration of the new US President to gauge the direction on tariffs etc. Given this mix, BI erred on the side of caution and keep the benchmark rate on hold this month. Separately, BI plans to buy at least ~IDR150trn worth bonds in the secondary market in 2025 to replace ~IDR100trn Covid-era bonds that mature next year.
The government, meanwhile, plans to proceed with the 1% increase in the VAT rate to 12% in 2025, along with stimulus measures to soften the impact, like exemptions on staples, electricity tariff cuts, incentives for labour intensive sectors and VAT exemption on few property sales etc. The government treads a fine line between its push to improve tax collections but is also mindful of the need to preserve the purchasing power of low-income households, given the regressive nature of indirect taxes. With staples and other selected categories likely to be kept outside the ambit, the inflationary impact on inflation will be less pronounced than previously estimated (~0.2-0.3pp). Demand faces headwinds in the near-term, as signaled by tepid trends in sentiments, retail sales and consumption loan growth.
The BSP meets today and might signal caution after today’s cut. Peso’s slippage on year-to-date basis is not expected to deter the BSP from cutting rates. Inflation has averaged 3.2% yoy in the first eleven months of the year, within the 2-4% target range. Uptick in Nov’s inflation to 2.5% from Oct’s 2.3% was mainly driven by higher food, owing to destructive typhoons during that period. Barring that price pressures are neither broad-based nor threatening at the juncture. Growth meanwhile has been on a softer footing, 3Q’s 5.2% marked the slowest pace of increase in a year, pushing the World Bank to trim its GDP forecast for 2024. Notwithstanding US-led uncertainty, the BSP is expected to lower rates this week, but keep an eye on the US Fed’s forward-looking commentary to gauge the path ahead.
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