Indonesia, Philippine central banks hold key rates steady

Jakarta

CENTRAL banks in Indonesia and the Philippines held their benchmark interest rates steady on Thursday, and pledged to keep policy accommodative as their economies struggle with the worst virus outbreaks in Southeast Asia.

Bank Indonesia held its seven-day reverse repurchase rate at 3.75 per cent, as predicted by 24 of 30 economists surveyed by Bloomberg; the others expected a 25-basis point cut. About a half-hour later, Bangko Sentral ng Pilipinas kept its overnight reverse repurchase rate at 2 per cent, as predicted by all 16 analysts surveyed.

Central bankers in both countries cited a benign inflation environment and said they will continue to pursue policies supportive of growth.

Bank Indonesia "has more space going into 2021" while its Philippine counterpart "is likely running out of ammunition", said Nicholas Mapa, senior economist at ING Groep NV in Manila. "Indonesia's recovery appears under way. The Philippines faces a steeper climb out from recession."

The yield on Indonesia's benchmark 10-year government bonds fell as much as 11 basis points after the decision, while the Jakarta Composite Index dropped 0.3 per cent. The rupiah was largely unchanged.

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In Manila, the peso closed at 48.045 per US dollar before the decision, near a four-year high. The benchmark stock index was little changed on Thursday.

Indonesia Bank Indonesia has lowered rates by a total of 125 basis points this year as it expects the economy to shrink 1-2 per cent, worse than the government forecast of a 0.6-1.7 per cent contraction. Despite the rate cuts, lending to business has not accelerated as hoped, given still-high funding costs and weak domestic demand.

The hold decision is in line with subdued inflation projections and recent stability in the rupiah, governor Perry Warjiyo said at a briefing in Jakarta.

"It looks to be a preservation of bullets for 2021," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. "With loan growth at an abysmal rate, Bank Indonesia is likely to reach for a rate cut again potentially as soon as in the first meeting of 2021 in January."

Mr Warjiyo has pledged to keep policy rates low as long as inflation remains muted to help the economy rebound next year. The central bank will also remain a standby buyer in government bond markets next year, after it recently wrapped up 397.56 trillion rupiah (S$37.4 billion) in direct bond purchases under an emergency burden-sharing programme this year.

The rupiah, a frequent concern for Bank Indonesia, has declined 0.5 per cent against the US dollar over the past month, and is down about 1.8 per cent on the year. The country posted a trade surplus of US$19.7 billion for January-November, providing space for the central bank to resume cutting rates early next year, according to some analysts.

Philippines Bangko Sentral has lowered rates by a total of two percentage points this year and has been at the forefront of virus-relief efforts, as the government has opted not to pursue outsized spending packages. Addressing reporters on Thursday in Manila, deputy governor Francis Dakila said there were "signs of green shoots" in the economy, but risks remain weighted to the downside. "The recovery remains tentative," he said. "This emphasises the need for continued policy support, which should continue to be in place until the economic recovery is firmly underway."

The central bank raised its inflation forecasts for this year and next, though price increases remain well within the 2-4 per cent target range. The bank now expects inflation this year to average 2.6 per cent - up from the 2.4 per cent forecast last month - and 3.2 per cent in 2021, up from 2.7 per cent previously. It maintained its 2022 inflation projection at 2.9 per cent.

The bank said in a statement that its accommodative policy, "together with sustained fiscal initiatives to ensure public welfare, should quicken the economy's transition toward a sustainable recovery". As well, its actions so far are appropriate to drive increased bank lending, but uncertainty caused by the pandemic has limited the usual transmission of monetary policy, Mr Dakila added.

"We suspect the recovery in the quarters ahead will disappoint," Alex Holmes, an economist at Capital Economics, wrote in a note after the decision. "With the virus still not under control, restrictions will need to remain in place for longer, which will further hold back the recovery. Promising news on vaccines looks unlikely to quickly change the situation." BLOOMBERG