ASEAN edges toward a more efficient monetary policy transmission

The Association of South-East Asian Nations is edging towards an efficient monetary policy transmission with more central banks exercising restraint in cutting policy rates despite ample space created by weakness in greenback and structurally lowers oil prices.

Further, central banks appear to be aware of the traditional policy transmission impairment and have taken the necessary remedial actions, including a broader consideration of monetary policy beyond a single policy rate, reports by ANZ confirmed.

Indonesia is heading towards adopting a new benchmark policy rate in August so as to tackle the problem of poor transmission of reference rates to market rates. This would also be an attempt to address the country’s growing tension of slowing deposit growth, leading to tightening of liquidity.

In addition, the central bank of Philippines, Bangko Sentral ng Pilipinas has already adopted a narrow interest rate policy amid structural excess liquidity to improve the transmission of monetary policy to the real economy, reports said.

"Perhaps the urgency with which governments are shifting their focus onto both fiscal stimulus and structural reforms to stimulate economic growth is the clearest evidence of this diminishing efficacy of monetary policy," ANZ said in a recent research note.

Meanwhile, India and Thailand have also adopted a mechanism of monetary transmission. Thailand has revealed a policy bias to cap the rising exchange rate, leading to a rise in foreign reserves.  Even India has tweaked its liquidity framework to amplify the impact of rate cuts on money markets.

However, with the possibility of a US Federal Reserve June rate hike gaining momentum, it is becoming rather difficult and challenging for ASEAN central banks to stick to traditional monetary policies.