ASEAN central banks expected to remain cautious

Central banks in Southeast Asia are expected to retain cautious, defensive stances on their domestic currencies amid the renewed strength of the US dollar, analysts said.

While the ongoing technical-level talks between Iran and the United States may have lifted sentiment in the Asian currency market, they noted that US monetary policy and the "idiosyncratic risks" of each member state of the Association of Southeast Asian Nations will continue to pressure Asian currencies.

The Oversea-Chinese Banking Corporation, or OCBC, in Singapore said in its latest research note that energy price pressures and the US Federal Reserve's approach will keep the central banks of India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam "on a hawkish bias".

Roman Ziruk, a senior market analyst at Ebury, a London-based fintech company, said the Strait of Hormuz reopening and a significant decline in oil prices are improving inflation prospects across the region, easing some of the central banks' biggest concerns.

"A return to normal, however, will not be immediate, and central banks may remain wary of second-round effects for the time being," Ziruk told China Daily.

He said the recent rally in the US dollar and upward repricing of US interest rates following the US Fed's hawkish shift are weighing on Asian currencies.

"This may keep the region's central banks more cautious than they would otherwise be," Ziruk told China Daily.

He noted the asymmetrical relationship between US and Asian policymakers and that the US Fed has an outsize impact on global capital flows, making Asian currencies vulnerable to higher US interest rates.

"In the end, it is often a difficult policy choice, and a reminder that in today's world, US rate changes can shape domestic policy, sometimes to an uncomfortable degree," Ziruk said.

The Indonesian rupiah, the Philippine peso, and the Thai baht have hit record lows in the past few weeks, with higher oil prices spiking domestic inflation, as most ASEAN economies are net oil importers.

In June alone, Bank Indonesia has raised interest rates twice to defend the rupiah.

The Bangko Sentral ng Pilipinas, or BSP, the Philippine central bank, said on June 18 that it had raised policy rates by 25 basis points to 4.75 percent owing to inflationary pressures.

At its Wednesday meeting, the Bank of Thailand, or BOT, maintained its current policy rate, noting that it will continue to monitor Thailand's inflation outlook and associated risks in the coming weeks.

"We do believe that regional central banks will err on the cautious side, watching the second-round effects of higher oil prices and supply chain disruptions," said Lavanya Venkateswaran, OCBC's senior economist for ASEAN and India.

Venkateswaran expects Indonesia and the Philippines to raise policy rates further in 2026, while Malaysia and Thailand may start tightening policy rates in 2027.

Sawidji Widoatmodjo, professor of strategic entrepreneurship at the Jakarta-based University of Tarumanagara, said that while the rupiah's depreciation created a competitive advantage for some exporters, this also squeezed other industries that rely on imports.

Leonardus Jegho in Jakarta contributed to this story.