South-east Asia seen shrugging off inflation threat as banks meet

[MANILA] The threat of inflation is growing in South-east Asia with central banks in Malaysia and the Philippines weighing action this week.

Malaysia's consumer price gains surged to an eight-year high in March while those in the Philippines were the highest since 2014 in April. Even with rising pressure to act, policy makers in both nations are forecast to remain on hold for now, Bloomberg surveys show.

"Inflation pressure is building up but there's still room to hold rates," said Michael Wan, an economist at Credit Suisse Group AG in Singapore.

"With uncertainties like volatile commodity prices and China's slowdown, it makes sense for central banks to keep their firepower."

For some, it's a matter of time. The Philippines is forecast to raise rates next quarter, the first in the region, as the economy expands more than 6 per cent. Incoming central bank governor Nestor Espenilla, who takes over in July, has said policy will be data dependent.

"Policy tightening is imminent in the Philippines, but a move appears unlikely this week," Gundy Cahyadi, an economist at DBS Group Holdings Ltd in Singapore, said in a note.

Oil is an inflation risk and growth remains strong, led by consumption, investment and infrastructure spending, he said.

Bangko Sentral ng Pilipinas will hold its benchmark rate at a record-low 3 per cent on Thursday, according to all but one of 18 economists. For Bank Negara Malaysia, analysts were unanimous in their view that the key rate will be kept at 3 per cent on Friday.

Household Debt

Bank Negara has left borrowing costs unchanged after a surprise interest-rate cut in July. While the recovery in exports reduces pressure to support the economy, higher borrowing costs could spur households to curb spending.

"A rate hike could potentially derail the economic recovery," said Krystal Tan, an economist at Capital Economics Ltd in Singapore.

"High interest rates could pose problems to Malaysian households that have high debt levels."

The central bank forecast in March that inflation will average 3 per cent to 4 per cent this year, up from 2.1 per cent in 2016.

The region is also grappling with the threat of capital outflows and weaker currencies as the US raises interest rates. The Philippine peso and Malaysian ringgit are among the worst performing Asian currencies against the US dollar in the past year.

BLOOMBERG