Rising likelihood of rate cuts in Asia?

SINGAPORE: Low inflation sweeping across Southeast Asia is here to stay, raising the odds some of the region’s biggest economies may reverse course on interest rates this year.

Food prices have been falling across the region, driving down inflation and pushing up real interest rates.

Malaysia is already in deflation, while others like Thailand are seeing almost stagnant price growth.

With the United States Federal Reserve turning more cautious on rate hikes, investors are bracing for further monetary policy easing in Asia after India took the first step last month.

While the three Southeast Asian central banks deciding rates this week — Indonesia, the Philippines and Thailand — are likely to stay on hold, they may signal some willingness to cut in coming months.

“With a more favourable external backdrop and more dovish turn from other central banks, we think the Philippines and Indonesia could afford to cut rates,” said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch.

“But they won’t be in a hurry given growth is generally still firm.” The case for further tightening in Thailand “is becoming less compelling”, he added.

In Malaysia, where Bank Negara Malaysia has kept interest rates unchanged since a 25 basis-point hike in January last year, calls for rate cuts are also getting louder. Data on Friday will probably show consumer prices fell for a second month in February.

Indonesia and the Philippines both hiked rates by a total of 175 basis points last year to ward off inflation pressures and shield the economy against the emerging market rout.

Thailand delivered its first rate hike since 2011 in December.

This year the story is very different. Currencies like the rupiah and peso have stabilised after the sell-off last year, inflation is at its lowest level in almost a decade in Indonesia and back in the target band in the Philippines.

In Thailand, price growth remains below the central bank’s goal.