We expect domestic demand to somewhat cushion the drag on growth from weaker exports aided by accommodative macro policies. Indeed, a sharp policy reversal by the US Federal Reserve and subdued inflation across the region have opened the door for easier monetary policy across the SEA region. Central banks in the Philippines and Malaysia have already reduced policy rates by 25bp each amid global uncertainties.
However, while inflation in the Philippines is back within the 2-4% target range, we believe that scope to reverse last year’s 175bp in rates is limited, as it is still vulnerable to renewed emerging market risk aversions and USD strength. The recent rise in oil prices also poses upside risks to inflation. As such, we look for only one more rate cut in Q3. In the case of Malaysia we see the recent loosening in policy as having been a preemptive move, and in the absence of worsening economic conditions we do not expect any further easing this year.
Following a pause in April, we also expect the Monetary Authority of Singapore (MAS) to also ease policy at its next biannual meeting in October, shifting to a more modest appreciation bias in its SG$NEER, a trade-weighted basket of currencies agains the SGD.
Meanwhile, although both Bank Indonesia and the Bank of Thailand have the scope to reduce interest rates, we look for both to remain on the sidelines. In particular, the BI remains focused on external stability and supporting the currency.