With Fed on Hold, Southeast Asia Is Diverging on Rate Policy

Why Fed's Hold on Policy Is Positive for Emerging Markets
  • Indonesia cuts interest rates for fifth time to spur economy
  • Philippines’ central bank may start tightening next year: DBS

With the U.S. Federal Reserve holding off on raising interest rates, Southeast Asian central banks are taking divergent approaches to monetary policy.

While Bank Indonesia lowered its policy rate by 25 basis points on Thursday, in line with the forecasts of most economists surveyed by Bloomberg, its Philippines’ counterpart stood pat as it weighs possible future tightening to guard against price pressures from a rapidly growing economy. That’s against the backdrop of low U.S. 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 policy makers, whether be it in the form of monetary or fiscal support,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group Ltd. 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 percent in the second quarter from a year earlier.

Bank Indonesia lowered its seven-day reverse repurchase rate to 5 percent on Thursday, taking the number of rate cuts this year to five. With inflation undershooting the 3 percent to 5 percent target in August -- coming in at 2.8 percent -- policy makers in Southeast Asia’s biggest economy have ample room to continue easing.

“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,” Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore, said before the rate decision.

The Fed’s decision on Wednesday to postpone its rate increase gives emerging markets some reprieve by underpinning investor sentiment in high-yielding assets. Indonesia’s rupiah and the Philippine peso gained as much as 0.4 percent against the dollar on Thursday.

“The Fed’s holding off further action shows it can be a little bit more patient,” Amando Tetangco, governor of the Philippine central bank, said in a mobile-phone message before the rate decision. “For our markets, this may mean that we could possibly see some slowing in the weakness of the peso in the near term until the next Fed meeting again. It may even encourage very short-term trades to squeeze some more juice from the carry.”

Turning Hawkish

Bangko Sentral ng Pilipinas left its policy rate at 3 percent, in line with the forecasts of all 16 economists surveyed by Bloomberg. The bank announced in May a policy overhaul, including lowering the benchmark and narrowing the band around it.

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

While headline inflation remains muted, slowing to 1.8 percent in August, the core measure picked up to 2 percent and may continue to rise, according to Gundy Cahyadi, an economist at DBS Group Holdings Ltd. 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.

“While Bangko Sentral ng Pilipinas seems fairly comfortable with the current inflation trajectory, expect the monetary policy bias to turn increasingly hawkish going into 2017,” he said before the rate decision.

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