- ASEAN-6 inflation is turning a corner, and on track to return to target by 2H23
- Regional inflation catalysts differ from the West, which could drive a divergence in policy
- Domestic considerations are likely to drive ASEAN central banks’ decisions
- We see some shifts in policy stance away from outright restrictive territory
- Vietnam & Indonesia are in the dovish camp, while Thailand is seen at the other end of the spectrum
Below is a summary; for full report and detailed charts, please download the PDF
ASEAN-6’s inflation dynamics are turning a corner, aided by easing supply chain disruptions, a correction in global commodity prices, and stabilisation in the respective currencies. Headline inflation prints are expected to return to target by 2H23 much to the comfort of the central banks. With regional inflation catalysts differing from the West, we expect few regional central banks to be more comfortable in front-running the US Fed in drawing a policy pause as well as shifting to an easing cycle.
Headline inflation to head towards target in 2H
Headline inflation is easing across ASEAN-6 in 2023, having topped out in 3Q22 for most of the bloc – Indonesia, Malaysia, Singapore, and Thailand, while that for the Philippines and Vietnam peaked in Jan23. Moderating global and supply-related price pressures are the key drivers behind this down move, which were the key drivers of higher headline inflation in 2022 (see ‘ASEAN-5: Evaluating key inflation drivers’).
Dissipating supply chain disruptions, correcting global commodity prices, and a reversal in downside currency pressures vs the US dollar will keep imported inflation at bay. Overall price pressures in ASEAN are likely to be more contained in 2023 vs 2022, barring fresh global supply-related shocks.
Sticky core begins to relent
Alongside headline inflation, core readings in the region also rose last year. Just as headline prints are off their highs, core is showing signs of a peak and retreating from their peak, but at a slower pace than the headline.
Our regression study (see ASEAN-6: Rising food prices and inflation worry) has established that headline inflation in ASEAN-6 typically did not revert to core, when analysed across – Jan16 to May21 and a broader Jan16 to mid-2022. This implies that traditional supply shocks-induced pick-up in inflation has not necessarily translated into generalised core pressures across the ASEAN-6 region.
Our analysis holds water in this cycle as well. Prevailing pandemic-led episode of sticky core inflation, in our view, was more reflective of – a) goods inflation passing the baton to services inflation on the reopening boost (restart of recreational facilities, hotels, tourism, etc.), and b) second order passthrough of cost adjustments lifting clothing, education, etc., rather than purely driven by demand forces.
Monetary policy pulls the brakes
We have emphasised in our previous notes that whilst the regional central banks had proactively tightened policy since last year, the pace and scale of hikes was not synchronous with the US Fed (see ‘ASEAN-5: Evaluating key inflation drivers’).
This theme is likely to prevail this year as well. Our base case is for the US Fed to pause after the last hike in May, and switch gears to an easing bias only in early-2024 when inflation nears the policy targets. While the US Fed remains a part of ASEAN central banks’ policy dashboard, domestic considerations will be a bigger driver.
Policy path ahead
Building in all these considerations, we outline our assessment of the various central bank stance in the next chart (see PDF). Amongst the most dovish is Vietnam, which has already cut several of its key interest rates in mid-March to support flagging growth, and further reduction to the refinancing rate appears likely (see ‘Vietnam: Dovish tilt amid growth headwinds). We view Indonesia as amongst the first few to pivot to an easing cycle in 2H23 when inflation is set to moderate expeditiously on base effects (see Indonesia: Rate policy to pivot, fiscal off to a strong start).
Malaysia hiked again in May23 after keeping interest rates unchanged in the past two meetings, and we think a prolonged pause is likely for four reasons listed in Malaysia: BNM done with hiking cycle.
Singapore, whose monetary policy is centred on managing the trade-weighted exchange rate, did not change the policy band’s slope, mid-point, and width during its bi-annual decision in Apr23. Policymakers judged that policy is sufficiently tight amid changing risk dynamics between weaker growth and easing core inflation especially in 2H23. We do not see tweaks to the SGD policy in the Oct23 decision (see ‘Singapore: MAS rebalancing growth and inflation risks’).
Philippines, which has embarked on the most aggressive hiking cycle in the region of 425bps since May22, is likely to judge that its policy rate is tight enough to tackle inflation, and be comforted that elevated inflation is finally cooling and not just due to the high base comparison a year ago (see ‘Philippines: The BSP to move to hawkish pause’).
At the other end of the spectrum is Thailand, where we still see 1-2 more 25bps hikes. The Bank of Thailand remains concerned over elevated underlying inflation and potential demand-pull risks from the tourism-led growth recovery, as well as concerns over long-term financial stability risks from low real interest rates. Yet, with domestic inflation on the decelerating path, and low global spill-over risks as the US Fed is expected to pull the brakes on this cycle, there is a risk that Thai policymakers could prematurely halt their current hiking cycle.
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Completed Date: 18 Jan 2023 11:04:34 (SGT)
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