[JAKARTA] They might be late to the party, but central banks in Southeast Asia are joining the global rush of easier policy, as deflationary pressures create room for them to prop up faltering growth without weakening defences against capital outflows.
Indonesia surprised markets with a rate cut on Tuesday, and Singapore eased its policy in January. Next month, many expect Thailand to lower interest rates, but Malaysia and the Philippines are not likely to do so in coming months.
Deflationary forces are giving policymakers some room to support faltering economies, as many grow at the slowest pace since the global financial crisis. As inflation falls, and sometimes turns negative, real interest rates are rising.
Bank Indonesia cited an improving inflation outlook, driven by the sharp drop in global fuel prices, when it cut its benchmark rate 25 basis points, reversing a hike three months earlier.
"Such policy measures were instituted based on Bank Indonesia's conviction that inflation will remain under control," Governor Agus Martowardojo said.
Southeast Asia's five main economies are estimated to have grown by just 4.5 per cent in 2014, the slowest since 2009, the International Monetary Fund said in January.
Before Indonesia's move, the market thought Southeast Asia would largely hold out against the global easing trend, for fear of triggering capital outflows, particularly if US rates were to rise.
But falling inflation and the risk that rising real interest rates could choke off already-weak growth are leading some central bankers to reassess.
"This is actually a good opportunity to adjust rates down to give growth a bit of a boost," said economist Santitarn Sathirathai at Credit Suisse.
The Bank of Thailand is thought to be the closest to following Indonesia by cutting rates. The coup-hit economy grew just 0.7 per cent in 2014, the slowest in three years, and has sunk into deflation.
The central bank prefers the military government lift spending to revive growth. And it remains concerned that cheaper borrowing costs might inflate credit bubbles - household debt is equal to 85 per cent of gross domestic product.
However, consumer prices in January fell 0.4 per cent from a year earlier, and the prospect of deflation making personal debts weightier in real terms suggests a rate cut may come soon.
It looks "increasingly likely" that the Bank of Thailand will cut rates at its March 11 meeting, HSBC told clients.
But Thai Finance Minister Sommai Phasee on Wednesday reiterated that cutting rates 25 or 50 basis points "will not help the economy much" and said the government is accelerating spending to spur growth.
Rate cuts may take longer in Malaysia and the Philippines, the region's fastest-growing economy, and may not happen. Analysts that disinflation gives the Philippines, which raised rates in 2014 when the pace of inflation was increasing, room to hold them the rest of this year.
Asked if Indonesia's cut might affect Manila, Bangko Sentral ng Pilipinas deputy governor Diwa Guinigundo said policy was determined by domestic factors, not "the monetary policy of our neighbours".
The Philippines had annual growth of 6.9 per cent in the fourth quarter, boosted by strong private consumption and exports.
"The economy remains robust and if additional stimulus is necessary, the big fiscal space is more appropriate," Mr Guinigundo said.
Malaysia's growth prospects are not so bright.
The net oil exporter is hurting, as crude prices are about 50 per cent of their June level. Malaysia's high growth - 5.8 per cent in the fourth quarter - isn't expected to last.
But even though interest rates are the highest since late 2008, economists don't see Bank Negara Malaysia cutting them right now.
Household debt is equivalent to 87 per cent of GDP. The ringgit's 10 per cent slide since mid-2014 aids manufacturing exports, yet keeps authorities cautious about reducing rates, which might lead to capital outflows.
Annual inflation fell to 1.0 per cent in January, the lowest since late 2009.
There's an array on opinion on what Malaysia will do next on rates, with most now believing it will make no change this year.
"There is room for Bank Negara Malaysia to ease if necessary, but that's not our base case at this juncture," ANZ bank said.