Southeast Asian central banks are using tools other than raising interest rates to defend their currencies from a surging dollar. Indonesia has kept tight liquidity by selling short-term government debt as bets grow that the Federal Reserve will keep interest rates high for longer, while Malaysia's interbank rates have risen to their highest level since July. While Southeast Asia has previously called for interest rates to peak, investors have grown cautious due to food and energy-related inflationary pressures and rising Federal Reserve interest rates.
Abhay Gupta, a strategist at Bank of America in Singapore, said: "We expect central banks in the region to continue to use liquidity tightening and intervention to prevent further depreciation of their currencies against the dollar." He also added that Southeast Asian central banks are concerned about "pseudo-tightening" Becoming more tolerant.
The difference between benchmark interest rates in Southeast Asia and the United States continued to widen as central banks in Indonesia, the Philippines and Malaysia suspended interest rate hikes in the first half of the year. Malaysia's benchmark interest rate is now 250 basis points away from the Fed's benchmark rate cap, a record high. Furthermore, it is also 2.3 standard deviations lower than the interest rate differential over the past five years. The same indicators for Indonesia, the Philippines and Thailand are -2.2, -1.8 and -1.7 respectively.
Despite the wide disparity in interest rates, Bank Indonesia has yet to indicate that it will raise interest rates. Instead, it started selling so-called SRBI securities, or 6-, 9- and 12-month notes, to attract foreign inflows and reduce reliance on benchmark interest rates. If there is too much tightening, it could hurt the economy.
Not only in Indonesia, but also in Malaysia and the Philippines, central banks are also using the issuance of government bonds to tighten liquidity and push up interest rates, Gupta said. The three-month Kuala Lumpur interbank rate has risen to 3.57%, the highest level since July 13. The average yield of Philippine National Bank's 56-day Treasury bonds when sold on September 22 was 6.7191%, the highest level since August 25.
The Philippine National Bank governor said the central bank may raise borrowing costs by 25 basis points at its November 16 meeting or earlier if risks in energy and transportation prices materialize. The Bank of Thailand raised its key interest rate by 25 basis points on Wednesday to a 10-year high of 2.5%, while signaling rising inflation risks.
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