With Fed on Hold, Southeast Asia Seen Diverging on Rate Policies

by Siegfrid Alegado, David Roman

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

While Bank Indonesia is set to cut its policy rate on Thursday, 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 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 last month kept its benchmark rate unchanged at 5.25 percent, but lowered the lending facility rate -- the level at which commercial lenders can borrow from the central bank -- by 100 basis points to 6 percent. 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.

All but three of the 19 economists surveyed by Bloomberg predict Bank Indonesia will cut its seven-day reverse repurchase rate to 5 percent from 5.25 percent 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 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 percent against the 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,” Vishnu Varathan, an economist at Mizuho Financial Group Inc. in Singapore, said in an e-mail. “There is scope for central banks to address wider economic risks confronting their economies.” Turning Hawkish

In the Philippines, all 16 economists surveyed by Bloomberg expect Bangko Sentral ng Pilipinas to keep the policy rate at 3 percent. The central bank last lowered the rate in May as part of an overhaul of its framework.

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.

Source : [Bloomberg](http://www.bloomberg.com/news/articles/2016-09-21/with-fed-on-hold-southeast-asia-seen-diverging-on-rate-policies

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