Indonesia, Philippines May Raise Rates, JPMorgan Says
Central bank officials in Indonesia, the Philippines and Thailand may raise interest rates this year as higher oil and commodity prices feed into inflation, according to JPMorgan Chase & Co.
Bank Indonesia has maintained the rate used as a reference for bill sales since December, while the Bank of Thailand last moved on its policy rate in July. Both central banks will raise borrowing costs in the second half, and the Philippines may boost its rate as early as this quarter, JPMorgan economist Sin Beng Ong wrote in a report published on April 25.
“The overall inflation trajectory in many cases is now expected to breach the inflation targets of the region's inflation-targeting central banks — Indonesia and the Philippines in particular,'' Singapore-based Ong said.
Crude oil rose to a record today. Rice, corn, wheat and soybean prices have all reached unprecedented levels this year. The International Monetary Fund, the World Bank and the Asian Development Bank have all warned that rising prices pose among the biggest threats to Asia's expansion.
The price of crude has risen 81 percent in the past year and reached $119.93 a barrel on the New York Mercantile Exchange today, the highest since trading began in 1983.
Balancing Threats
Asian central bank officials are balancing the threat of an economic slowdown against signs of quickening inflation. Gains in commodity prices were expected to ease this year amid forecasts of a slowdown in global demand, translating into lower inflation pressures in the second half of 2008, Ong said.
“This assumption is now being severely tested by the continued appreciation of food and fuel prices, and with the U.S. expected to bypass a sharp slowdown, raises the risk that these prices could continue to remain elevated over the course of 2008,'' Ong said.
In China, inflation has quickened to the fastest pace in 11 years, and consumer prices in Sri Lanka and Vietnam have exceeded 20 percent cash advance loan. Singapore's consumer price gains have reached levels not seen since 1982.
“Following the recent surprise uptrend in inflation across the Asean countries, coupled with a milder-than-expected slowing in the regional economies, the focus among the monetary authorities will likely be shifting to inflation from the prior focus on growth,'' Ong said. Asean stands for the Association of Southeast Asian Nations.
Higher Rates
Bank Indonesia will probably raise its benchmark interest rate to 8.5 percent by the end of the September and to 9 percent by year-end, Ong said. In Thailand, central bank governor Tarisa Watanagase and her board will boost borrowing costs to 3.5 percent from 3.25 percent next quarter, and by another 25 basis points by the end of 2008, he said.
JPMorgan is forecasting an earlier move by the Philippine central bank, which left interest rates unchanged for a second meeting on April 24 after five cuts since July.
Bangko Sentral ng Pilipinas will raise its benchmark rate by 25 basis points as soon as this quarter, and again in the next three-month period to 5.5 percent, Ong predicts.
The revisions reflect “the risk that commodity prices could remain elevated for longer than initially expected and that tight labor markets risk exacerbating those pressures,'' he said. “Monetary policy over the medium-term is not the most appropriate tool with these shocks, but in the near term, the risk of a significant lift in inflation expectations from these shocks will likely cause the monetary authorities to move.''
Ong didn't change his forecasts for Bank Negara Malaysia, foreseeing the central bank to leave its benchmark rate at 3.5 percent until the end of 2009.
Filed under: legal by Forest