UBS sees Asian central banks cutting rates next year

MANILA, Philippines - Swiss-owned investment bank said it expects UBS central banks in Southeast Asia to slash interest rates next year amid slower economic growth as well as a benign inflation outlook.

UBS economist Edward Teather said in a report that the central banks of member countries of the Association of Southeast Asian Nation (ASEAN) except Singapore are expected to ease their respective monetary policy stance next year.

“Given slower growth, we expect lower or modest inflation (relative to history) will allow further monetary easing from ASEAN-5 central banks,” Teather stressed.

He pointed out that central banks in the region, including the Bangko Sentral ng Pilipinas (BSP), would cut interest rates except in Singapore where the policy response would involve adopting a less steep rate of appreciation for the Singapore dollar.

UBS said it sees the BSP slashing interest rates by 50 basis points to four percent next year from 4.5 percent this year, followed by the Bank Negara of Malaysia that is also expected to cut policy rates by 50 basis points to 2.5 percent from three percent. Bank Indonesia is expected to cut policy rates by 25 basis points to 5.75 percent from six percent while Bank of Thailand is also seen to slash rates by 25 basis points to three percent from 3.25 percent.

The BSP raised interest rates by 50 basis points this year to curb additional inflationary pressures, bringing the overnight borrowing rate to 4.5 percent and the overnight lending rate to 6.5 percent. It also adopted several enhanced tool kits including raising the reserve requirement for banks to siphon off excess liquidity in the financial system and several foreign exchange liberalization measures to manage the strong foreign capital inflows.

The investment bank has lowered the inflation forecast for the Philippines to 3.5 percent instead of four percent next year and to 4.6 percent instead of 5.1 percent in 2013. It also lowered the inflation projection for Indonesia to five percent instead of 5.5 percent next year but retained the forecast for 2013 at 6.5 percent.

However, UBS raised the inflation forecast for Singapore to 3.1 percent instead of 2.5 percent next year but retained the projection for 2013 at 3.1 percent. It also retained the inflation forecast for Malaysia at 2.5 percent next year and 3.2 percent in 2013 and Thailand at 3.3 percent and 4.1 percent.

Teather explained that the easing of monetary policy in ASEAN would also be augmented by fiscal policy easing resulting to weaker currencies across the region.

“In concert with easier monetary policy and given the weak economic environment around the turn of the year, we expect further currency weakness over the next three months. Because of the availability of foreign exchange reserves we expect downward pressure on the currencies to be managed with a view to supporting growth but also limiting volatility,” the UBS economist explained.

UBS said it forecasts the peso to weaken to 45 to $1 over the next three months before appreciating to 42 instead of 40 next year, while the Singapore dollar would weaken to 1.32 before strengthening to 1.20, followed by the Thai baht that is expected to slip to 33 before recovering to 30. The Indonesia rupiah would slow down to 9400 within the next three months before recovering to 8700 next year, while the Myanmar kyat would depreciate to 3.25 before recovering to 3.0.

“Once growth recovers we expect renewed (local or foreign) investor interest in the region to put currencies under upward pressure. Again, the pace of appreciation should be limited by currency intervention,” he added.

UBS recently scaled down the economic growth forecast for the Philippines together with other ASEAN countries this year and next year due to the country’s slackening domestic output amid the global slowdown as well as the sovereign debt crisis in Europe.

It lowered the projected gross domestic product (GDP) growth of the Philippines to 3.6 percent instead of 4.3 percent this year and to 3.3 percent instead of four percent next year. It also lowered the GDP growth forecast for Thailand to 1.5 percent instead of 2.6 percent this year due to the floods but hiked the growth projections for Indonesia to 6.3 percent from six percent, Malaysia to 4.7 percent from four percent, and Singapore to 5.5 percent from 4.5 percent.

For 2012, the investment bank lowered the growth forecast for Malaysia to three percent instead of 3.5 percent, and Singapore to two percent instead of three percent. It retained the GDP growth forecast for Indonesia at 5.5 percent but raised the GDP growth projection for Thailand to four percent from 3.2 percent.

The revised economic growth forecasts took into account the lower growth forecasts for Europe as well as the impact of the recent floods in Thailand. The financial and trade shock emanating from Europe would result in weaker growth and weaker capital flows into the ASEAN region in the near term.

Latest data from the National Statistical Coordination Board (NSCB) showed that the GDP growth of the Philippines slackened to 3.2 percent in the third quarter from 7.3 percent in the same quarter last year due to weak global trade and underspending by the Aquino government bringing the GDP expansion to 3.6 percent from January to September this year.

Economic managers led by Socioeconomic Planning Secretary Cayetano Paderanga said it would be difficult for the government to meet the revised GDP growth of 4.5 percent to 5.5 percent set by the Cabinet-level Development Budget Coordination Committee (DBCC).