Rate hikes in store for Southeast Asia's two biggest economies

[BANGKOK] The outlook for interest rates in Southeast Asia's two biggest economies is upward even after mixed inflation data on Monday.

In Thailand, rising food and energy costs boosted inflation to 1.6 per cent in August, the highest in almost four years, adding to the case for the Bank of Thailand to deliver its first rate hike since 2011. The policy rate of 1.5 per cent is now below inflation, making the economy only the second one in Southeast Asia, alongside the Philippines, to have a negative real interest rate.

Separately, data showed consumer-price growth in Indonesia was little changed at 3.2 per cent last month. While that's well within Bank Indonesia's 2.5-4.5 per cent target band and should offer some respite to policy makers, the rupiah's slide to a two-decade low against the dollar will put pressure on the central bank to hike rates for a fifth time this year.

Nomura Holdings Inc. economist Euben Paracuelles sees both central banks hiking rates this year. Inflation isn't the "main driver of BI's policy decisions at the moment" and the subdued figures don't change his forecast of another increase at the September policy meeting, he said.

Nomura's base case is also for a 25 basis-point increase in the Bank of Thailand's policy rate on Sept. 19, although recent comments from Governor Veerathai Santiprabhob have lowered the probability. Veerathai said in an interview on Aug. 29 that the central bank doesn't face immediate pressure to tighten monetary policy like other emerging-market peers.

Indonesia's rupiah has slumped more than 8 percent against the dollar this year, while the Thai baht is down 0.4 per cent.

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