Last updated Thursday, September 29, 2016 12:01 am GMT+8

Thursday September 22, 2016
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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. — Reuters picBank 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. — Reuters picMANILA, Sept 22 — 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 today, 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 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 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 — policy makers 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 tomorrow, 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.

The Fed’s decision yesterday 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 per cent against the dollar today.

“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. “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

In the Philippines, all 16 economists surveyed by Bloomberg expect Bangko Sentral ng Pilipinas to keep the policy rate at 3 per cent. 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 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 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. — Bloomberg

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