With Fed on hold, South-east Asia seen diverging on rate policies

With the US Federal Reserve holding off on raising interest rates, South-east Asian central banks like Bank Indonesia are tipped to take divergent approaches to monetary policy.
With the US Federal Reserve holding off on raising interest rates, South-east Asian central banks like Bank Indonesia are tipped to take divergent approaches to monetary policy. PHOTO: REUTERS

MANILA/SINGAPORE (BLOOMBERG) - With the US Federal Reserve holding off on raising interest rates, South-east Asian central banks are tipped to take divergent approaches to monetary policy.

While Bank Indonesia is set to cut its policy rate on Thursday (Sept 22), according to most economists surveyed by Bloomberg, its Philippines' counterpart is forecast to stand pat as it weighs possible future tightening to guard against price pressures from a rapidly growing economy. That's against the backdrop of low US interest rates, which is bolstering investor appetite for higher-yielding emerging-market assets.

"Other countries in the region like Indonesia would warrant more support from policymakers, whether be it in the form of monetary or fiscal support," said Ms Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. "That's not the case for the Philippines."

The two countries face different growth risks: Bank Indonesia has been in easing mode since the beginning of the year, cutting rates four times to help counter sliding commodity prices; the Philippines is among the fastest-expanding economies in Asia, with gross domestic product climbing 7 per cent in the second quarter from a year earlier.

Bank Indonesia last month kept its benchmark rate unchanged at 5.25 per cent, but lowered the lending facility rate - the level at which commercial lenders can borrow from the central bank - by 100 basis points to 6 per cent. With inflation undershooting the 3 per cent to 5 per cent target in August - coming in at 2.8 per cent - policymakers in South-east Asia's biggest economy have ample room to continue easing.

 

All but three of the 19 economists surveyed by Bloomberg predict Bank Indonesia will cut its seven-day reverse repurchase rate to 5 per cent from 5.25 per cent on Thursday, with the rest expecting no change.

"The justification to cut rates is there, given that inflation has surprised on the downside and it's looking like it's going to be benign for the rest of the year," said Mr Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore.

Another positive for Indonesia is that the currency is proving to be more resilient in the face of Fed policy uncertainty. The rupiah has gained 4.9 per cent against the US dollar this year, helping to keep a lid on price pressures, while investors are still keen on rupiah sovereign bonds even as the yield advantage is set to erode with another rate cut.

"The Fed, by staying on hold, diminishes possible policy tension," Mr Vishnu Varathan, an economist at Mizuho Financial Group in Singapore, said in an e-mail. "There is scope for central banks to address wider economic risks confronting their economies."

In the Philippines, all 16 economists surveyed by Bloomberg expect the central bank to keep the policy rate at 3 per cent. It last lowered the rate in May as part of an overhaulof its framework.

President Rodrigo Duterte, who took office in June, aims to boost growth to as much as 7 per cent this year, underpinned by a ramp up in infrastructure spending and strong domestic demand.

While headline inflation remains muted, slowing to 1.8 per cent in August, the core measure picked up to 2 per cent and may continue to rise, according to Mr Gundy Cahyadi, an economist at DBS Group Holdings in Singapore. The central bank may begin tightening liquidity in coming months by increasing the volume of its term deposit facility auction, before raising its benchmark rate next year, he wrote in a note.