By Swati Pandey and Vatsal Srivastava
China and New Zealand sat tight after the Federal Reserve's latest rate hike, but both Indonesia and the Philippines are expected to tap the policy brakes later on Thursday to prop up their battered currencies and temper financial risks.
In a statement that marked the end of the era of "accommodative" policy, Fed policymakers lifted rates by 25 basis points (bps) to 2.00-2.25 percent. The U.S. central bank foresees another hike in December, three more next year, and one in 2020.
The Fed outlook is pressuring Asian currencies across the board, but not all countries need to tweak their policy. New Zealand is comfortable with a weaker kiwi as it helps its exporters. In China, a weaker yuan does raise concerns about capital outflows, but its currency is tightly managed and it also has capital control tools to mitigate financial risks.
For countries that run widening trade deficits, however, weaker currencies are posing risks to inflation, growth and financial stability.
"Policies in Philippines, Indonesia and India will remain in a tightening mode," said Prakash Sakpal, Asia economist at ING.
Bangko Sentral ng Pilipinas (BSP) is seen hiking rates by 50 bps to 4.50 percent later on Thursday to curb inflation and shore up the fragile peso, adding to the three hikes worth 100 bps since May.
In August, inflation surged to a more than nine-year high of 6.4 percent, above the central bank's 2-4 percent comfort range, prompting policymakers to say they will take "strong immediate action."
Around the same time as the BSP, Bank Indonesia is seen adding 25 bps to its four previous hikes this year, bringing rates to 5.75 percent, or 150 bps higher since May.
The peso is trading around its lowest in 12 years, having shed some 8 percent against the dollar year-to-date, while the rupiah is around a two-decade low after a 9 percent plunge.
Asia's worst performing currency, the rupee , which has weakened by more than 12 percent to record lows, is also likely to be a key consideration for Reserve Bank of India, which is expected to hike by 25 bps next week.
"This (Fed) tightening will likely prove too much for the rest of the world," said Anna Stupnytska, global economist at Fidelity International.
"Emerging market economies, in particular, have already been facing tighter financial conditions this year, which have resurfaced some vulnerabilities as capital flows started reversing."
The Hong Kong Monetary Authority moved in lockstep with the Fed as its currency is pegged to the greenback.
(For a graphic on 'Asian economic outlook' click https://tmsnrt.rs/2OaS544)
For the stronger Asian economies, which are increasingly gravitating towards China on trade and investment, and away from the United States, the Fed outlook does not move the needle as much as it did during its previous tightening cycles.
South Korea's central bank Governor Lee Ju-yeol said the Sino-U.S. trade conflict, as well as weakness in inflation and the job market weighed against policy tightening. Later on Thursday, Taiwan is also widely expected to leave rates unchanged at 1.375 percent.
The Reserve Bank of New Zealand kept rates at 1.75 percent, where they have been for the past two years, citing tepid inflation and the risk of a trade war.
Like most economies in Asia, New Zealand is now much more closely integrated with China than with the United States.
Worries that China's economy is slowing and will further suffer from an intensifying trade row with Washington are therefore more relevant for most Asian economies' interest rate outlook than the strength of the U.S. economy.
New Zealand now trades about twice as much with China than it does with the United States, a consequence of Beijing's staggering growth over the last two decades.
When Lehman Brothers collapsed in 2008, triggering the global financial crisis, New Zealand traded with the United States 1.35 times more than with China. Just before Beijing joined the World Trade Organisation in 2001, that ratio was 4.25 times in Washington's favour.
"China’s economic outlook matters more than the U.S.," said Mark Wills, who develops multi-asset strategies for institutional clients at State Street Global Advisors.
(For a graphic on 'New Zealand's trade with China and the United States' click https://reut.rs/2N2HTGn)
ASIAN EMs STRONGER
China's central bank skipped open market operations on Thursday, meaning it did not immediately adjust borrowing costs for interbank loans after the Fed hike. The People's Bank of China stood pat in June, but raised rates slightly in March shortly after Fed's move. [L4N1WD1A9]
Despite the trade risks and slowing consumption, China is still seen growing at an impressive rate of around 6.5 percent this year. For Asian emerging markets, this is an advantage that they have over peers in Latin America and elsewhere.
That, coupled with less worrying current account deficits and stronger economic prospects, is likely to help Asia avoid the kind of tumult that has seen Argentina hike rates to 60 percent and Turkey to 24 percent this year.
"Asian central banks have been vigilant, and pre-emptive ... in running their monetary policies," said Frances Cheung, head of Asia macro strategy at Westpac Banking Corporation.
"They gain credibility in this cycle."
(Reporting by Swati Pandey in Sydney and Vatsal Srivastava in Singapore; Writing by Marius Zaharia in Hong Kong; Editing by Shri Navaratnam)