Central banks across Asia have resumed hiking interest rates while consumers struggle in the face of persistently high inflation. Following monetary tightening in Indonesia and the Philippines, the region will see key policy meetings next week from Japan and Malaysia.
How are Asia’s policymakers handling the tough battle, and how are weak local currencies and rampant inflation affecting the region? Here is a selection of stories to bring you up to date on the latest developments.
The Japanese yen hit a new low for the year, briefly falling past 150 against the dollar and reaching its lowest level since October 2022, when authorities had to step in to stem the slide.
Over the past few months, the Bank of Japan has been grappling with an increasingly impossible task: simultaneously fighting deflation and inflation. With the yen hovering at its weakest level in decades, pressure is mounting on the BOJ to do something.
Indonesian rate hike highlights Asia’s tough battle to defend currencies
Indonesia’s central bank made a surprise move by raising its benchmark interest rate by 25 basis points to 6% after keeping it unchanged for eight consecutive meetings. The move highlights the tough task facing other Asian central banks to defend currencies and fight inflation.
Singaporeans face higher bills and fares as inflation bites
Singapore has started raising prices on utilities and transportation, straining household budgets even more amid stubbornly high inflation. “The cost of living in Singapore is getting too high,” an engineer in his 50s lamented.
Malaysian, Thai economies suffer as currencies slide vs. dollar
Southeast Asian currencies are trading near their lows for the year against the surging dollar, with the Malaysian ringgit and Thai baht leading the decline, as governments and businesses in the region worry about the economic impact of the depreciation.
The cheaper currencies are bringing higher import costs. Regional exporters, on the other hand, are struggling to take advantage of the slide, as uncertainties prevail in big markets, especially China.
While a weaker currency generally benefits exporters and tourism, a sustained fall risks triggering capital outflows. The recent uptick in oil prices has also raised fears of faster inflation.
“A combination of a higher dollar, a weaker Chin[ese economy] and higher oil prices [has] become a dangerous cocktail for most of the ASEAN economies,” Charu Chanana, market strategist at Saxo Markets in Singapore, told Nikkei Asia.
The ringgit and the baht are the worst performers in Southeast Asia this year against the dollar, falling 6.9% and 4.4%, respectively, through Oct. 13. The Vietnamese dong is down 3.4%, while Singapore’s dollar and Indonesia’s rupiah have held up relatively well against the greenback, slipping 2.1% and 0.7%, respectively.
The broad depreciation comes on the back of strong U.S. economic and wage growth that has pushed Treasury yields and the dollar higher. The resilient U.S. economy has led some investors to conclude the Federal Reserve will keep interest rates higher for longer to fight inflation.
Higher interest rates in the U.S. attract investors seeking better returns, encouraging capital outflows from Southeast Asia and weakening regional currencies. In particular, the Malaysian ringgit hit a 10-month low of 4.729 against the dollar on Oct. 4.
Malaysia’s currency has been hit by a widening interest rate gap with the U.S. On the back of moderating inflation, at 2.0% in August, Malaysia’s central bank has tightened only once this year, in May, when it lifted the benchmark rate a quarter point to 3%. By contrast, the Federal Reserve has lifted the U.S. overnight rate to between 5.25% and 5.5%.
At the same time, the ringgit has been hurt by Malaysia’s greater exposure to the Chinese economy, which is seeing disappointing growth. “The Malaysian ringgit moves in lockstep with the Chinese yuan,” said CIMB Group’s Intan Nadia Jalil. Weaker prices for commodities such as palm oil and natural gas, which make up a big share of Malaysian exports, are another negative factor.
Malaysia’s Prime Minister Anwar Ibrahim, who doubles as finance minister, on Tuesday said the government is “exploring initiatives” to trade in local currencies to reduce its reliance on the dollar for trade and investment.
“To entirely end reliance on the U.S. dollar will be difficult, but Malaysia will be more active and aggressive in the use of the ringgit” for trade, Anwar told the parliament. Malaysia has started using local currencies in transactions with Indonesia, Thailand and China.
Concerns in Malaysia about a sharp dollar rally are echoed by neighbors such as Thailand, where the local currency also hit a 10-month low of 37.07 baht per dollar on Oct. 3.
Analysts at the Kasikorn Research Center said foreign investors have also sold the baht due to a lack of confidence in the economy and concerns over Thailand’s fiscal discipline, particularly the government’s contentious digital money handouts, which it is estimated will create up to 560 billion baht (US$15 billion) in new public debt.
The Thai currency is not only weaker but also volatile, raising concerns for exporters, which are unlikely to be able to take advantage of the depreciation. The volatility of the baht makes exporters reluctant to quote prices as they fear incurring exchange rate losses.
The Joint Standing Committee on Commerce, Industries and Banking (JSCCIB), which groups some of Thailand’s largest industries, said the government “should try to stabilize” the local currency in an acceptable range that would support exports.
In Indonesia, a weaker currency typically helps export-oriented companies, such as coal miners and palm oil producers. But Indonesia’s trade surplus has trended lower this year, undermining support for the rupiah.
Although Indonesia posted a $3.12 billion trade surplus in August, exports fell 21% in value terms from a year earlier to $22 billion, weighed down by lower commodity prices and weaker demand from China.
Meanwhile, the Philippine central bank has not changed its tone on the peso’s depreciation, as central bank Gov. Eli Remolona believes a hawkish stance will benefit the local currency. The central bank has traditionally preferred a weak peso because it raises the value of remittances from overseas workers.
At the same time, a weaker currency means disproportionately higher costs for importers, especially for the energy and other inputs needed to manufacture products for export.
Vietnam, for example, has the highest rate of imports and exports as a share of gross domestic product in the region, after Singapore. Analysts say the higher costs hurt even more now because this is a key period for imports, which have been rising steadily since the summer as manufacturers gear up for the Christmas season.
Despite this, the Vietnamese central bank became the first in Asia to cut interest rates this year. It began doing so in March in hopes of “removing the difficulties for the economy.” Vietnam wants to encourage lending and business activity amid lukewarm global demand for its exports, a real estate crisis and mass layoffs.
“While these measures were introduced to bring relief to the property sector, there is a risk of a knock-on effects on energy imports,” said Nick Ferres, chief investment officer at Vantage Point Asset Management, adding that coal prices were especially affected. “We see the energy sector in Vietnam feeling the pinch from high exchange rates, with a possibility of passing on these costs to consumers.”
For now, Richard Bullock, a senior research analyst at Newton Investment Management, said he believes that the currency declines have been “manageable” for the region. “Balance of payments are generally healthy across the region, and foreign exchange reserves are sizable enough to cushion short-term capital outflows,” Bullock told Nikkei Asia.
However, higher oil prices could weigh on regional economies, which have been experiencing lower inflation than the U.S. and Europe. In September, Brent crude traded above $90 a barrel for the first time since November 2022, triggered by supply cuts from Saudi Arabia and Russia.
In a research note on Oct. 3, Morgan Stanley said it expects oil prices of more than $90 a barrel through the middle of 2024. The investment bank, which has stayed bearish on Asian currencies, warned the higher oil price “could have a decent impact” on the region’s inflation.
“The market might underestimate the risk of Asian central banks turning more hawkish should inflation surprise the market on the upside going into 2024,” the note said.
