Indonesia, Philippines Hold Key Rates as Recovery Continues

Central banks in Indonesia and the Philippines held their benchmark interest rates steady 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%, 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%, as predicted by all 16 analysts surveyed.

Central bankers in both countries cited a benign inflation environment and said they’d continue pursuing 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.”

Indonesia, Philippines Hold Key Rates as Recovery Continues

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%. The rupiah was largely unchanged.

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


Bank Indonesia has lowered rates by a total of 125 basis points this year as it expects the economy to shrink 1% to 2%, worse than the government forecast of a 0.6% to 1.7% 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.”

What Bloomberg Economics Says...

“We expect the combination of rupiah gains from capital inflows and sluggish domestic demand to provide scope for another 50 basis points of easing next year. More rate cuts would be beneficial -- even with suboptimal pass-through by banks to lending rates -- by helping to keep a lid on government borrowing costs as its debt balloons.”

-- Tamara Mast Henderson, Asean economist

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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 ($28 billion) in direct bond purchases under an emergency burden-sharing program this year.

The rupiah, a frequent concern for Bank Indonesia, has declined 0.4% against the dollar over the past month, and is down about 1.7% so far this year. The country posted a trade surplus of $19.7 billion for January-November, providing space for the central bank to resume cutting rates early next year, according to some analysts.


Bangko Sentral has lowered rates by a total of 2 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 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 emphasizes the need for continued policy support, which should continue to be in place until the economic recovery is firmly underway.”

What Bloomberg Economics Says...

“Despite an uncertain growth outlook, further rate cuts are unlikely as policy transmission is weak. That suggests BSP may also need to deploy additional measures to encourage lending.”

-- Justin Jimenez, Asia economist

For the full report, click here

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

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, 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.”

©2020 Bloomberg L.P.

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