The combination of rising inflation, slowing growth and currency volatility presents a complex environment for policymakers in Southeast Asia as they assess which risks are most prominent. On the one hand, central banks may consider increasing interest rates – or pausing rate cuts – to help curb rising inflation and support their currencies. Conversely, policymakers may need to take action to support growth if their economies come under increased pressure from declining global demand for their exports.
The Bank of Thailand recently indicated it intends to hold rates at 1% for “as long as possible”, claiming it will follow a “look through strategy” for the spike in inflation caused by the conflict in Iran. The logic is that supply-side inflation caused by an external shock is better weathered through stability than countered with rate increases that could suppress domestic demand.
The State Bank of Vietnam has also left interest rates on hold but urged commercial banks to lower deposit rates and offer cheaper borrowing to individuals and businesses to support the economy. Meanwhile, The Bank of Indonesia has increased interest rates twice since the conflict in the Middle East began, as it looks to stabilize its currency and manage inflation, which hit 4.76% in February.
