Three Asian economies have raised their interest rates after the Fed’s rate hike yesterday.
Hong Kong has raised its base rate by 25bps to 2.5% form 2.25%, resulting in commercial banks in the territory increasing their benchmark lending rates for the first time in 12 years.
Indonesia and the Philippines—both seeing their local currencies dropping significantly in the year—have also hiked their rates.
Year-to-date, the Indonesian rupiah has lost 9% and the Philippine peso 8% versus the US.
Indonesia has its rates up by 25bps to 5.75%—the fifth hike in the year.
Will Philippines have one more hike before year-end?
The Philippines raises rates by 50bps to reach 4.5%—this fourth increase has taken the cumulative hike since May to 150bp.
Prakash Sakpal, economist, Asia at ING said there could be one more 25bps rate hike by the Philippines’ central bank before year-end.
“The rate hikes so far still leave a negative real interest rate as a pull on the currency,” he noted. “The supply disruptions due to the worst typhoon in recent years will have undoubtedly bumped up inflation higher from August’s 6.4% rate.”
ING’s September inflation forecast for the country is 6.9%, saying that it’s now close to peaking.
Will India’s Reserve Bank hike by more than 25bp?
The Reserve Bank of India will announce its monetary policy decision next Friday.
While the Indian rupee is among the hardest hit Asian currencies this year, Sakpal isn’t convinced that the country would tighten aggressively to curb currency weakness.
“Although the RBI needs more tightening, it’s likely to argue that inflation, the main policy target, has been well-behaved, currently under the 4% (+/-2%) medium-term target,” he said. “ING continues to forecast one more 25bp RBI rate hike this year at the December meeting, and two hikes in 2019.”
Besides inflation, ongoing troubles in India’s financial sector from a serial default by a non-bank finance company on its debt obligations and resultant liquidity squeeze would not allow the RBI to go beyond the conventional 25bp hike, Sakpal predicted.
In addition, the government has started taking measures to rein in the rupee's weakness - which although have so far proved to be inadequate, reduce the onus on the RBI to support the currency, he said.
“We still can't underestimate the potential inflationary impact of ongoing currency depreciation, which will further be complicated by the impact of higher oil prices due to the supply disruption from Iran sanctions,” Sakpal noted. “If not in the next couple of months, we expect inflation to rear its head again, thus keeping the RBI busy going forward.
China rates unchanged
The People’s Bank of China leaves interest rates unchanged.
China’s refusal to hike its rates reflects the country’s goal to keep borrowing costs low as part of the move to stabilize economic growth as the trade war with the US intensifies.