After having a tight monetary policy for a year, Asian central banks are suddenly forced to rethink their monetary policy in order to tackle rising inflation and defend weakening currencies.
Singapore and the Philippines surprised markets with unscheduled tightening announcements last week, underlining the growing urgency among policymakers to act.
Asia in general has lagged as the rest of the world began lifting rates already in June, after the US Federal Reserve started its policy tightening.
“Have central banks been too slow to act? Yes, I know, it’s a common question,” Ravi Menon, managing director of the Monetary Authority of Singapore, said at a recent conference. “Very few people saw this coming. The markets didn’t see it.”
Among the worst hit, the Philippine peso is down more than 10 year-to-date, and just off a nearly 17-year low of 56.53 per dollar. Yields on the country’s government bonds have spiked about 200 basis points since the start of the year.
The Thai baht has fallen more than 10 percent this year. Thailand also broke a promising five-month streak of foreign investment into equities to lose $816 million in June.
Asian central banks are suddenly finding they can no longer ignore rising food and oil prices. Thailand and Indonesia saw inflation hit multi-year highs this month. Even South Korea, which began raising rates as early as August 2021, saw prices hit a 24-year high in June, triggering a record half-point rate hike last week.
India, which first saw its central bank raising rates by 40 bps in an off-cycle move in May, has logged six straight months of foreign investor equity outflows, contributing to a record drop in the rupee.
The historically volatile Indonesian rupiah is actually only down around 5% against the dollar for the year, although it saw its largest monthly fall of 2.2% in June. It has to some extent been helped by the resource-rich country’s improved trade position and the fact foreigners now hold less than a fifth of its high-yielding bonds.
The Philippines and Thailand are the most vulnerable in Southeast Asia owing to their current account deficits and reliance on tourism.
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