(Repeats story published earlier on Wednesday to add additional
codes, no changes to text.)
* Mismatch between cenbank rhetoric and market pricing for
hikes
* Pressure could force rates up while recovery still fragile
* Indonesia, S. Korea among the most aggressively priced for
rises
By Tom Westbrook
SINGAPORE, March 31 (Reuters) - As Brazil, Russia and Turkey
lift interest rates to ward off inflation and currency
pressures, investors are beginning to prod Asia's central banks
to follow suit, setting up a potential showdown with countries
keeping rates at record lows.
South Korea and Indonesia, where central bankers have cut
hard and downplayed the prospect of imminent tightening, are
most firmly in the spotlight and interest rate swaps have raced
to price in rate rises within a year. KRWIRS IDRIRS1
Hikes in Thailand, Malaysia and India over the next 12
months are also in investors' sights and the danger is that the
mood could force policymakers to choke off support sooner than
they please, or risk capital flight and a currency selloff.
The moves also open a gap against benchmark U.S. short-term
rates, which have barely moved and, now that Brazil, Russia and
Turkey have made unexpectedly bold hikes, leave Asia's central
banks lagging both their peers and the market.
While economists see a growing distinction between the risk
profiles of Asian emerging markets and other more vulnerable
blocs, they warn Asia nonetheless remains exposed to sudden
shocks to global sentiment.
"Asia central banks now need to be a bit more cautious,"
said Sonal Varma, chief economist for Asia ex-Japan at Nomura in
Singapore, with historically low rates in the region and
"choppy" global capital flows.
"Some sort of additional compensation in terms of risk will
need to be given," she said, especially in countries such as
Indonesia where foreigners hold more than a fifth of government
debt and the financial system is vulnerable to capital flight.
Bank Indonesia (BI) cut its benchmark rate by 25 basis
points to 3.5% only in February, and yet swaps are already
priced for about 50 basis points of hikes over the next 12
months, according to analysts at DBS Bank in Singapore.
Binay Chandgothia, a portfolio manager at Principal Global
Investors, said while BI might need to hike rates if the rupiah
IDR= weakens towards 15,500 per dollar, about 7% from current
levels, the central bank probably has the room to hold a while.
"If they hike, they'll probably have to hike at least twice
to bring stability," he said, which could dampen domestic growth
before local demand finds a footing.
"Exports have been driving Asia, and I think the markets are
beginning to think about the next leg - that's where domestic
consumption and forced rate hikes are creating some sort of
concern," he said.
LONG SHADOW
Concern has also filtered through to emerging market stocks,
which are lagging their developed peers, and currencies where
dealers see a stronger dollar driving an increase in demand for
options products to hedge against the risk of even further
greenback gains.
Asia's central bankers have so far held firm, and, to be
sure, a slew of investors and advisors think rates markets have
run too far ahead.
"In my view, investors are drawing incorrect parallels
between now and recent past episodes of rate hike cycles," said
Nader Naeimi, head of dynamic markets at AMP Capital.
In 2015 and 2018, he said, emerging market economies hiked
rates in the face of faltering growth to stem outflows, while
this time growth and inflation are firming.
DBS rates strategist Duncan Tan has recommended fading the
move in swaps markets, including in South Korea where last week
central bank chief Lee Ju-yeol made an out-of-cycle statement to
emphasise there is no rush to tighten. Swaps there have retreated slightly, but they are still
aggressively priced for about 30 basis points of tightening over
the next 12 months KRQMCD1Y= and almost 50 basis points over
the next 18 months KRQMCD18M= .
Even if Asia's economies are better placed for recovery than
peers in Latin America or Europe, and the central banks well
equipped with reserves, the perception that authorities are
caught behind the curve may be enough to scare away global cash.
"No matter what Indonesia is still an emerging market...so
there are always going to some who take that bucket approach,"
said Wellian Wiranto an economist at OCBC Bank in Singapore.
"And when dealing with a country like Indonesia, there's
always that long shadow of crises of the past."
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Asia's short-term rates market positioned for hikes https://tmsnrt.rs/3sCjoVN
Asia's benchmark policy rates https://tmsnrt.rs/3dgYrJD
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intervention ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>