A trader uses a telephone while working on the floor of the Colombo Stock Exchange in the central business district of Colombo, Sri Lanka. (Photographer: Kuni Takahashi/Bloomberg)

Rate Hikes Still a Wildcard in Asia as Volatility Returns

(Bloomberg) -- Interest-rate hikes are still on the table in Asia as market volatility returns, with Sri Lanka unexpectedly increasing its benchmark rate.

Sri Lanka’s central bank raised the standing lending facility rate to 9 percent from 8.5 percent on Wednesday, and almost half of the analysts surveyed are calling for another increase in the Philippines on Thursday.

A hike could be near in Thailand after the central bank held its key rate in a close vote, while most economists expect Indonesia to hold its ground, following in the steps of Malaysia last week.

  • Click here to read about Sri Lanka’s rate decision, and here to read about Thailand

After a brief lull that’s helped the region’s worst-hit currencies recover, the volatility in emerging markets has returned and some central banks are coming under pressure to raise interest rates. The Federal Reserve is set to continue on its aggressive tightening path when it next meets in December.

Rate Hikes Still a Wildcard in Asia as Volatility Returns

“The fundamental sources of pressure remain and there are still chances that regional central banks will act preemptively,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “The Fed is still hiking and the dollar strength has yet to fade. Current-account deficits also make countries like Indonesia, Philippines and India vulnerable.”

Here’s what to watch for in the statements:

Thailand

Bank of Thailand left its benchmark rate unchanged at 1.5 percent, where it’s been since 2015. The decision was close with three of the seven committee members voting for an increase to 1.75 percent, the most since 2011.

The central bank said the need for the accommodative monetary policy would be gradually reduced, even as the economy faces risks including a drop in exports and manufacturing, and a slowdown in tourism. Inflation has returned to the central bank’s target range of 1 percent to 4 percent, but remains near the lower end of the band.

Rate Hikes Still a Wildcard in Asia as Volatility Returns

“A 25-basis point rate hike could still be in the cards next month with the more hawkish tone seen at the meeting today,” said Tim Leelahaphan, an economist at Standard Chartered Bank in Bangkok.“The outlook for Thailand’s economic growth is still quite strong at above 4 percent for the full year. It justifies a move for the bank at its last meeting of the year.”

Indonesia

Bank Indonesia’s efforts to stabilize the currency, including 150 basis points of rate hikes since May, are starting to pay off. The rupiah has gained 3 percent against the dollar in the past month, the best performer in Asia.

Of the 31 economists surveyed, 28 predict the key rate will be unchanged at 5.75 percent on Thursday. The rest expect a hike of 25 basis points.

Inflation remained subdued at 3.16 percent in October and well within the central bank’s 2.5-4.5 percent target range. Still, Indonesia is not out of the woods with a widening current-account deficit highlighting the economy’s vulnerability to outflows, and some economists predict more rate hikes ahead.

“It is indeed a temporary pause as we expect BI to hike alongside the U.S. Fed,” said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore, who predicts the rate will reach 6 percent by the end of this year.

Philippines

With inflation still a threat, economists are split with 11 of 19 predicting a hike in the Philippine benchmark rate to 4.75 percent on Thursday.

The central bank, which has boosted the rate 150 basis points since May, has left open the prospect of another round of policy tightening, while in the same breath flagging the chances for a hold.

Rate Hikes Still a Wildcard in Asia as Volatility Returns