Citi study cites PH, Thailand central banks

The Philippines and Thailand are at the least risk of falling “behind the curve” in conducting monetary policy relative to domestic output and inflation path, based on a regional research by American banking giant Citigroup.

In a June 20 research titled “Which Central Bank Is More Behind the Curve Than the Others?” a team led by Citigroup chief economist for Asia-Pacific Johanna Chua constructed a framework to evaluate central banks in the region. The appropriateness of monetary policy in Asia was defined as a function of the country’s output gap, or the difference between actual and potential gross domestic product, and the departure of expected inflation from a central bank’s medium-term inflation target.

Based on the review, the Citi research said Taiwan looked relatively more behind the curve in Asia while Thailand and the Philippines were the least so. Indonesia and Korea were also noted to be relatively more behind the curve albeit in less magnitude than Hong Kong and Taiwan.

Thailand appeared consistently the most “ahead of the curve” in the research. Citigroup noted that the Bank of Thailand had been proactively increasing interest rates, making real rates relatively less negative than most in Asia. Growth in Thailand this year was likewise projected to be the weakest in the region and thus was estimated to have the lowest output gap. Meanwhile, Thai inflation expectations are still below target despite a temporary rise in core momentum led by processed food, the research added.

“The Philippines follows Thailand as being relatively less behind the curve than the rest of the region. This isn’t too much of a surprise—inflation has been consistently well below Bangko Sentral ng Pilipinas’ inflation threshold (Citi assumed 5 percent), output gaps are not that high and normalized real rates are not as low as others,” the research said.

The BSP has lifted its key policy rate—the overnight borrowing rate—from a record-low by a total of 50 basis points this year to 4.5 percent. During the policy rate-setting last week, it kept the interest rates unchanged but raised the reserve requirement or the portion of deposit and deposit substitutes held by banks by one percentage point.

On the other hand, Hong Kong was cited as “unequivocally the most behind the curve” central bank in Asia especially given that its policy rate was noted to be distorted by the “abnormally prolonged” low US Federal Funds rate.

Despite relatively benign inflation/core inflation momentum, Citi said Taiwan also surprisingly ranked relatively high in its “behind the curve” ranking, given relatively high estimated output gaps and low real rates vis-à-vis history.

Indonesia was also noted to be “relatively more vulnerable” to being behind the curve while Korea and Singapore appeared “slightly more behind the curve” relative to the region.