Indonesia, Malaysia Hold Rates as Fed Fuels Currency Decline

Updated on
  • Most economists predicted decision by the two central banks
  • U.S. policy tightening putting pressure on EM currencies

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Central banks in Indonesia and Malaysia kept their benchmark rates unchanged on Thursday to help bolster their currencies and guard against capital outflows as the U.S. moves to tighten monetary policy.

Bank Indonesia kept its seven-day reverse repurchase rate at 4.75 percent, as forecast by all but one of 21 economists surveyed by Bloomberg, while Bank Negara Malaysia left its overnight policy rate at 3 percent.

The prospect of more Federal Reserve rate increases -- fueled by Donald Trump’s surprise U.S. election win -- is putting pressure on emerging-market currencies and closing the door on policy easing in Southeast Asia. Central banks in the region are now seeking to provide stability as global uncertainty mounts.

While Indonesia’s rupiah “has been broadly stable over the past month, it is likely to come under renewed downward pressure later this year if, as we expect, looser fiscal policy in the U.S. prompts the Fed to raise rates further than markets currently anticipate,” said Gareth Leather, senior Asia economist at Capital Economics Ltd. in London.

Bank Indonesia cut its benchmark rate six times last year to help support economic growth as inflation remained subdued. Price pressures are starting to build, with a central bank official on Thursday predicting inflation will climb above 4 percent this year. Consumer prices rose 3 percent in December from a year ago, remaining inside the bank’s target band for this year of 3 percent to 5 percent.

Malaysia’s Outlook

Malaysia’s central bank also flagged higher inflation for 2017 in a statement announcing its rate decision. The ringgit has slumped about 6 percent since Trump’s victory, prompting the Bank Negara to take steps to restrict some offshore foreign-exchange trading to help stabilize the currency.

“While the risks of destabilizing financial imbalances are contained, the monetary policy committee will monitor these risks to ensure the sustainability of the overall growth prospects,” the bank said.

Indonesia’s growth prospects appear better than Malaysia’s for this year. The central bank said the economy will probably exceed 2016’s projection of about 5 percent. Malaysia’s government is forecasting growth of 4 percent to 5 percent for this year.

Bank Indonesia believes it’s “about time” for S&P Global Ratings to upgrade the country’s rating to investment grade as the country has improved its fiscal performance, said Juda Agung, executive director for monetary policy, told reporters in Jakarta. S&P is last of the three main credit-rating companies to keep Indonesia on junk status.

S&P said on January 10 that it may raise Indonesia’s rating to investment grade in 2017 or 2018 if the country’s institutional settings delivered better spending, deficits on a declining trend, moderate government debt, and limited contingent fiscal liabilities.

— With assistance by Herdaru Purnomo, Rieka Rahadiana, Manish Modi, Yumi Teso, and Eko Listiyorini

(Updates with central bank’s comments on S&P rating in penultimate paragraph.)
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