Indonesia, Malaysia enter final laps of rate-hike cycle
CENTRAL banks in Indonesia and Malaysia will likely each deliver another modest interest rate increase, as they look to wind down their monetary tightening and turn their attention to economic growth.
Bank Indonesia (BI) and Bank Negara Malaysia are expected to raise their benchmark rates by 25 basis points at their respective meetings on Thursday (Jan 19), according to Bloomberg surveys. A separate poll showed that most analysts expected this to be Malaysia’s final hike and the penultimate move for Indonesia.
The two countries face similar circumstances, with headline inflation off their peaks as core gauges run hot. A modest hike could ward off any lingering price pressures, especially ahead of festivities around Ramadan observed from March.
Easing US inflation and a downshift in the Federal Reserve’s tightening are propping up regional currencies, including Indonesia’s rupiah and Malaysia’s ringgit, which in the year to date have gained 3.2 per cent and 2 per cent, respectively.
Appreciating currencies help ward off imported inflation, but they are bad news to exporters, especially during times of weaker global demand. Given the headwinds, policymakers in both nations will likely hold back from further aggressive tightening.
Indonesia
BI will likely increase its seven-day reverse repurchase rate to 5.75 per cent, its highest level in more than three years, according to 23 of 28 analysts polled. Five expected the central bank to hold for the first time since July 2022.
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While full-year inflation last year came in below the central bank’s expectations, it may be too early for governor Perry Warjiyo to let his guard down, with the December print surprising on the upside. President Joko Widodo has also called attention to the rising costs of food staples.
That could derail Bank Indonesia’s pledge to bring headline inflation back within the 2 to 4 per cent goal in the second half of this year, and keep the core gauge within the target band throughout.
While the rupiah has been among the region’s top gainers this year with the return of foreign funds, it may miss the commodity boom that brought in dollars in 2022. The latest exports data disappointed, and the trade balance is expected to flip to a deficit in 2023.
BRI Danareksa Sekuritas chief economist Telisa Falianty said: “A rate hike will also help lighten the load from the decreasing trade balance and maintain a positive trend on FX (foreign exchange) reserves.”
If pressure on the currency dissipates further, BI may be able to end its tightening cycle earlier than expected and support economic growth, which has been predicted to slow this year.
Krystal Tan, an economist at ANZ Banking Group, said: “A sustained rebound in the rupiah would raise the odds of an earlier stop at 5.75 per cent”. The institution forecast BI’s terminal rate at 6 per cent.
Malaysia
Bank Negara Malaysia is expected to increase the overnight policy rate to 3 per cent, according to 17 of 18 economists surveyed. One predicted that the central bank would decide to hold.
Kenanga Investment Bank analyst Afiq Asyraf Syazwan said that another rate hike would help curb record core inflation, while further realigning Malaysia with global monetary policy normalisation.
“In March, we are only assigning a 50 per cent probability of another similar-sized rate hike, due to the expectation of a global economic slowdown and increasing uncertainties, especially on the geopolitical front,” he said.
Malaysia was the first to raise its benchmark rate in South-east Asia’s tightening cycle which started in May 2022, although the Philippines emerged as one of the most aggressive. Another hike on Thursday would bring borrowing costs back to levels just before the pandemic.
Shivaan Tandon of Capital Economics said: “We think declining inflation and a sharp slowdown in economic growth will prompt the central bank to conclude its tightening cycle, as it then shifts focus from containing inflation towards supporting demand.” BLOOMBERG
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