A tale of two banks: Why Thailand and Philippines will have opposing policy statements

Whose policy will remain stable?

According to DBS, the BOT and the BSP meet this week. Expect two very contrasting policy statements, even if both central banks may keep their respective policy rates stable.

Here's more from DBS:

The BOT is likely to keep its policy rate stable for now. While the efficacy of fiscal policy under the military government (or the interim government said to be in August) is still uncertain, it is clear that it will be pro-growth.

Consumer confidence may get a lift if a peaceful transition will be seen. To a certain extent then, there is likely to be less pressure on the BOT to trim its interest rate further.

Indeed, the effectiveness of further rate cuts in boosting growth is also questionable. Cheaper borrowing cost does not necessarily translate into higher credit growth, if consumers and businesses lack confidence in the domestic economy.

Evidently, loan growth continued to moderate despite the rate cuts in the past year. Looking ahead, any monetary tightening is highly unlikely in the near-term.

Expect the BOT start tightening its policy only in the latter half of 2015, barring a positive shock to the economy. Not like the BSP will raise its policy rate this week though. But we expect the central bank to remain somewhat hawkish. There are risks of CPI inflation touching the 5% mark in 3Q14. Even if this may prove to be temporary, it will only support the central bank’s case to further normalize its monetary policy.

The reserve requirement rate (RRR) has been raised twice this year, as liquidity in the financial system remains abundant. Loan growth is at record-high 20% YoY and this may only add to inflationary pressures in the economy.

Note that this policy adjustment is done from a position of strength. A 6-7% GDP growth remains almost a certainty for 2014 and 2015. Domestic demand remains resilient and external liquidity is robust given that strong overseas foreign workers’ remittances continue to bolster the balance of payments position.

And as far as policies are concerned, the authorities may in fact prefer some moderation in growth, to prevent overheating risks in the medium-term. Expect the BSP to raise its policy rate by a total of 50bps in 2H14.