JAKARTA -- Asian central banks that have been forced into aggressive rate hikes this year have been given some breathing room in 2019, after the U.S. Federal Reserve struck a more dovish tone in its monetary policy for the year ahead.
The Fed's monetary policy has been the key cause of the plunge in emerging market currencies. Its new projection of two rate hikes next year, one less than it previously indicated, will come as a relief for Asian monetary authorities who spent the best part of 2018 trying to prop up their currencies.
One such country is Indonesia, which has raised its benchmark seven-day reverse repo rate six times by a total of 175 basis points this year, as the rupiah tumbled to a 20-year low against the U.S. dollar in October.
Bank Indonesia kept its interest rate unchanged in its final monetary policy meeting on Thursday, a day after the Fed's decision. Although it did not rule out further rate hikes in its statement, central bank Governor Perry Warjiyo said at a news conference: "Because our estimate for Fed fund rate hikes [in 2019] has changed from previously three times to twice, of course it affects how we will see our key rate policies [next year]." His comments indicate a more moderate pace of interest rate hikes in 2019.
Inflation in the country remains around 3%, well within the central bank's target range -- another reason that there is little pressure for Bank Indonesia to tighten hastily.
A slower pace of monetary tightening is also expected for the Philippines, which has seen its central bank raise its interest rate five times by the same amount as its Indonesian counterpart this year.
Bangko Sentral ng Pilipinas, BSP for short, was forced to end nearly four years of keeping policy unchanged as the currency slumped to a 13-year low against the greenback in September, and inflation hit a nine-year high breaching the central bank's target range of 2-4%.
BSP also kept interest rates steady at 4.75% in its final meeting of 2018 last week, as consumer prices eased for the first time in a year in November. The central bank expects inflation to fall back to within its target range in 2019.
"The lower inflation forecasts increase the likelihood that the BSP may be done with its recent tightening cycle with the next series of moves probably in the realm of monetary easing," said Nicholas Antonio Mapa, economist at ING Bank Manila. If the Fed takes a more dovish stance next year, Mapa said the BSP could slash policy rates by the second quarter of 2019.
India, another country that has seen its currency hammered by a stronger dollar, also kept its policy rate on hold in its December meeting. While retaining its stance of "calibrated tightening," the Reserve Bank of India also lowered its inflation forecasts for next year to 3.6% from 4.3%, suggesting a more dovish stance in 2019.
The Bank of Thailand, the nation's central bank, raised its key interest rate for the first time since 2011 on Wednesday. But another hike will be some time off, as the baht is relatively stable compared with those of regional peers.
However, economists do not rule out the possibility of accelerated rate hikes in Asia's emerging markets, especially as there remains uncertainty over the global economy.
The trade spat between the U.S. and China, which weighed on investor sentiment and caused them to ditch riskier emerging market assets, will likely continue into next year further putting pressure on local currencies.
"We expect investors' concerns about the outlook for the global economy to get much worse in 2019 too, as the U.S. and Chinese economies falter," said Capital Economics in a note last week. "We suspect that the general retreat from risky assets will continue, causing most EM currencies to weaken a little more against the dollar, even as Treasury yields fall further."
Nikkei staff writer Mikhail Flores in Manila contributed to this report.