South-east Asia may soon need a 'Plan B' to deal with low inflation: S&P Global Ratings

[SINGAPORE] South-east Asia is set for another year of low inflation, generating difficult choices for the region's central banks.

S&P Global Ratings sees inflation remaining below central bank targets in most cases in 2020, according to Shaun Roache, S&P's chief APAC economist in Singapore. Policymakers may soon have to think about using tools other than interest rates to achieve their policy goals, he said.

"The story will quickly turn to 'Plan B', which could be some combination of forward guidance, negative rates and quantitative easing, even in an emerging market like Thailand," he said. "This could be the big story of 2020."

Central banks in South-east Asia's main economies - Indonesia, Thailand, Singapore, Malaysia, the Philippines and Vietnam - eased monetary policy in 2019, unwinding some of the previous year's tightening as growth prospects worsened. Some have scope to ease again in 2020, but policymakers will need to balance that against currency and financial-stability risks.

Policy space is closing fastest in Thailand. The central bank, which left its benchmark rate unchanged this week at 1.25 per cent, has struggled to get inflation back into its 1 per cent to 4 per cent target amid a surging currency. The Bank of Thailand is expected to narrow the target band, possibly to 1 per cent to 3 per cent, according to Standard Chartered plc.

In Indonesia, policymakers will drop the inflation target to 2 per cent to 4 per cent in 2020, from 2.5 per cent to 4.5 per cent this year. Bank Indonesia deputy governor Destry Damayanti said in a recent interview that the economy has entered "a new norm" of historically low inflation.

Below-trend growth "will prevent the economy from soaking up spare capacity," keeping price pressures subdued, Mr Roache said.

BLOOMBERG