Hike rates

AfDB: Asian central banks will raise their rates against the strong dollar and inflation

The Asian Development Bank (ADB) said central banks in the region are expected to continue raising interest rates due to the strong dollar and the need to curb inflation.

In a briefing last Wednesday, the AfDB’s Abdul Abiad said headline inflation and core inflation had risen in most economies in the region, leading to “broadening price pressures” that require a tightening of monetary policy.

Based on the latest inflation data, the Philippines’ core inflation, which excludes volatile food and energy items that feature in headline inflation, rose steadily to 4.6% in August 2022 from 3.9% in July 2022 and 2.8% in August last year.

“Underlying inflation in several of our economies has also already increased. In other words, you are already seeing broadening price pressures. It is therefore essential that central banks stay one step ahead and continue to tighten policy. One of the lessons from what the US Fed has been through is that it’s quite costly to fall behind,” said Abiad, director of the economic research and regional cooperation department in the macroeconomic research division.

Abiad said that even though central banks have tightened monetary policy in the region, some countries are still unable to keep up with rising inflation. This also indicates that further tightening is expected in the region.

“Some countries, even though they hit their policy rates, did not raise them enough to keep pace with inflation with higher inflation expectations, and as a result, real rates stayed the same or went up. actually declined slightly for some, although for many others actual rates increased,” Abiad said.

“So we expect policy rates to continue to push up inflation, because I have to both lean against inflationary pressures to counter depreciation and currency outflows and basically just preserve financial stability. “, he added.

When it comes to the Philippine peso, Abiad said, the currency is performing near the regional average, indicating that it was doing better than most currencies in the region. This, he said, despite the peso depreciating by about 13%.

The only problem with the Philippine peso is the strength of the dollar, which should continue to cause further depreciation of currencies in the region. The strength of the dollar is affected by the continued hike in interest rates by the US Federal Reserve.

Abiad said he expects the US Federal Reserve to be close to raising interest rates again “by at least 75 basis points” this week. This will again put pressure on currencies in the region to depreciate further.

On Wednesday, the Philippine peso closed at P58 against the greenback, another all-time low. On Tuesday, the peso closed at 57.48 pesos per US dollar.

“The Philippines are not extreme. This is actually very close to the average for the region. Much of the depreciation of the Philippine peso reflects not so much the weakness of the peso as the strength of the dollar. And so it’s really driven by Fed tightening again,” Abiad said.

In the Asia Development Outlook Update, the AfDB said real policy rates had fallen in India, Pakistan and the Philippines, bucking the regional trend.

The report indicates that this is due to an increase in key rates lower than the increase in inflation expected. “Real interest rates, however, are low or even negative in many economies.”

Picture credits: Kechuan | Dreamstime.com