THE Asian Development Bank (ADB) said central banks in the region are expected to continue raising interest rates on the back of the strong dollar and the need to curb inflation.
In a briefing last Wednesday, ADB’s Abdul Abiad said both headline and core inflation have been on the rise in most economies in the region leading to a “broadening of price pressures” that require tightening monetary policy.
Based on the latest inflation print, the Philippines’s core inflation, which excludes volatile food and energy items that are in the headline inflation, steadily rose to 4.6 percent in August 2022 from 3.9 percent in July 2022 and 2.8 percent in August last year.
“Core inflation in several of our economies has also already been on the rise. So in other words, you’re already seeing a broadening of price pressures. And so it is actually critical that Central Banks stay ahead of the curve and continue tightening policy. One of the lessons from what the US Fed went through is that it’s pretty costly if you do fall behind the curve,” said Abiad, Economic Research and Regional Cooperation Department Director of Macroeconomics Research Division.
Abiad said even if CBs have tightened monetary policy in the region, some countries still are not able to keep up with the rise in inflation. This also indicates that further tightening is expected in the region.
“Some countries, even though they’ve reached policy rates, they haven’t raised it by enough to keep pace with inflation with higher inflation expectations, and therefore real rates have either stayed the same or have actually declined slightly for some, although for many others, real rates have increased,” Abiad said.
“So we definitely expect policy rates to continue rising in inflation as I am to both lean against inflationary pressures to counter currency depreciation and outflows and basically just safeguard financial stability,” he added.
In terms of the Philippine peso, Abiad said, the currency is performing near the regional average indicating that it was doing better than most currencies in the region. This, he said, is despite the peso depreciating by around 13 percent.
The only issue with the Philippine peso is the strong dollar, which is expected to continue causing currencies in the region to further depreciate. The strong dollar is being affected by the continued rise in interest rates by the US Federal Reserve.
Abiad said he expects that the US Federal Reserve is poised again to hike interest rates “by at least 75 basis points” this week. This will again put pressure on currencies in the region to depreciate further.
On Wednesday, the Philippine peso closed at P58 to the greenback, another all-time low. On Tuesday, the peso closed at P57.48 to the US dollar.
“The Philippines is not at the extreme end. It’s actually very much close to the average for the region. So much of the depreciation in the Philippine peso reflects not so much weakness in the peso but strength in the dollar. And so it’s really again driven by the Fed tightening,” Abiad said.
In the Asian Development Outlook Update, ADB said real policy rates declined in India, Pakistan, and the Philippines, bucking the regional trend.
The report stated that this was due to an increase in policy rates that are less than the increase in the expected inflation. “Real interest rates, however, are low or even negative in many economies.”