China shrugs off Fed rate hike

But forex risks push Philippines and Indonesia into hikes

SYDNEY: China, Taiwan and New Zealand sat tight after the Federal Reserve’s latest rate hike, but Indonesia and the Philippines pulled the trigger yesterday to prop up their battered currencies and temper risks to inflation and financial stability.

In a statement that marked the end of the era of “accommodative” policy, Fed policymakers lifted rates by 25 basis points (bps) to 2%-2.25%. The US central bank foresees another hike in December, three more next year, and one in 2020.

The Fed outlook is pressuring Asian currencies across the board, but not all countries need to tweak their policy. New Zealand is comfortable with a weaker kiwi as it helps its exporters. In China, a weaker yuan does raise concerns about capital outflows, but its currency is tightly managed and it also has capital control tools to mitigate financial risks.

For countries that run widening trade deficits, however, weaker currencies are posing risks to inflation, growth and financial stability.

“Economies such as India and Indonesia are more exposed to outflows... We will continue to see further depreciation in 2018 and throughout 2019, although perhaps at a slower pace,” said Carlos Casanova, Apac economist at Coface, who expects more hikes in the two countries and the Philippines.

Bangko Sentral ng Pilipinas hiked rates by 50 bps to 4.5% to curb inflation and shore up the fragile peso, adding to the three hikes worth 100 bps since May.

In August, inflation surged to a more than nine-year high of 6.4%, above the central bank’s 2%-4% comfort range.

Bank Indonesia added 25 bps to its four previous hikes this year, bringing rates to 5.75% as expected, or 150 bps higher since May.

The peso is trading around its lowest in 12 years, having shed some 8% against the dollar yearto-date, while the rupiah is around a two-decade low after a 9% plunge.

Asia’s worst performing currency, the rupee, which has weakened by more than 12% to record lows, is also likely to be a key consideration for Reserve Bank of India, which is expected to hike by 25 bps next week.

All three currencies ended steady on Thursday.

One potential silver lining for the Asian deficit trio may be that the Fed is underestimating the impact of its past and future hikes as well as other factors such as the trade war on the global economy, and implicitly, the recoil back home, some analysts say.

Against a backdrop of slower-than-expected Fed tightening, ING Asia economist Prakash Sakpal sees 75 bps worth of hikes in Indonesia, 125 bps in Philippines and 100 bps in India by end-2019, including Thursday’s increases.

“This (Fed) tightening will likely prove too much for the rest of the world,” said Anna Stupnytska, global economist at Fidelity International.

“The Fed will have to strike a more cautious tone.” The Hong Kong Monetary Authority moved in lockstep with the Fed as its currency is pegged to the greenback.