International | Aug 18 2006
By Greg Peel
HSBC economists believe the ASEAN-4, Singapore, Malaysia, Thailand and The Philippines, will soon follow Indonesia’s lead and begin to cut interest rates.
Headline inflation for the group bottomed in the third quarter of 2002 at 1.4% and has since risen to 5.5%. Energy accounts for 60% of that rise. However, the energy effect will soon appear to lessen, as comparative measures show less of a surge in prices than was the case last year. This will lead to a drift off in inflation numbers.
The market is already expecting inflation to dip, and hence rates to fall. HSBC, however, has a slightly contrary view on both counts. Paradoxically, the economists believe inflation will not fall as much as expected but that rates will be cut more than expected.
This view is derived from econometric modelling, which suggests that while Singapore’s inflation will fall noticeably it will be less of a case for the others, and for Indonesia.
To explain their strange view, the economists offer their analysis of central bank “reaction functions”.
They find that the ASEAN banks are heavily influenced by growth developments. Hence as inflation grew and economies grew faster, central banks tended to raise rates in a pre-emptive response. The same should thus apply as economic growth begins to slow, and inflation begins to teeter. Any sign of a slowdown, says HSBC, will be met with prompt rate reductions.
Bank Indonesia was the most aggressive in raising rates, and has already begun to cut. HSBC expects the rate to fall from 11.75% to single digits next year.
The Philippines will be next, with the Bank of Thailand following thereafter and Bank Negara (Malaysia) bringing up the rear.
Singapore will not begin to cut in any meaningful way, says HSBC, until the Fed does.
